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Modern  Banking; 

Commercial  and  Credit 

Paper 


(IN  FIVE  PARTS) 

By 

FREDERICK  SILVER 


A  New,  Authoritative,  and  Standard  Reference  Work  in  Five  Parts  Coverino-  the 
Entire    Field    Relative   to   Modern    Banking  and    Credit    Practice ;    Bank    Accep- 
tances ;  Trade  Acceptances ;  Commercial  Banking  and  Credits ;  Banking  Under 
the  Federal  Reserve;  The  Federal  Reserve  System  with  Amendments,  Rul- 
ings,   Regulations,   Opinions   of   Counsel   on   the   Subjects   of   Bank  and 
Trade  Acceptances  and  Commercial  Banking  to  1920;  American  and 
Foreign  Discount  Markets ;   American  and   Foreign  Credit   Sys- 
tems;     etc.,     etc.       Complete     with     Forms,     Agreements, 
Records    on    the    Subject    of    Acceptances,    Commercial 
Banking  and  Credits;  Dollar  Credits  for  Financing 
Foreign    Trade;    Laws    Relating    to    Negotiable 
Instruments,  their  Taxation ;  Digest  of  Bill 
of  Lading  Laws ;  U.  S.  Warehouse  Laws 
and  their    Relation   to   Acceptances 
and    Commercial    Banking;    In- 
vestments ;  Foreign  Financ- 
ing; etc.,  etc. 


The  Commercial  and  Financial  Institute  of  America 

New  York  City. 


To 

A. 

in  measureless  appreciation 
Of  a  spirit  of  accomplishment 
which  comes  from  contact 
with  a  clear  and  helpful  mind, 
this  work  is  affectionately 
dedicated 
Feb.  23,  1920 


Copyright,  1920 
The  Commercial  and  Financial  Institute  of  America 

New  York 


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PLAN  OF  BOOK 

Introductory 

The  plan  in  Part  I  of  the  book  is  to  review,  first,  the  simple  pro- 
cedure in  banking  and  credits;  their  development;  their  relation  to  the 
subject  of  money,  and  to  give  an  analysis  of  the  meaning  and  utility 
of  credit.  A  treatise  on  the  banking  system  of  the  United  States 
before  the  adoption  of  the  Federal  Reserve  System  is  given  for  the 
purpose  of  drawing  a  comparison  with  the  Federal  Reserve  System 
following.  The  principles  and  operation  of  the  Federal  Reserve  are 
briefly  but  interestingly  outlined  in  their  particular  relation  to  com- 
mercial banking  practice  and  to  the  rapidly  growing  American  dis- 
count market. 

The  banking  and  credit  systems  of  England,  France  and  Germany 
cc  should  be  found  very  helpful  and  of  interest  to  the  study  and  to  the 
cc  application  of  the  acceptance  method  in  commercial  banking  and  credit 
33  practice. 

Part  II  treats  of  the  trade  and  bank  acceptance  and  their  importance 
to  modern  day  commerce  and  finance.    Therein  are  reviewed  many  im- 
^  portant  topics  comparatively  new  to  American  banking  and  business. 
?*■   The  history  of  the  acceptance,  its  re-introduction  into  the  system  of 
H  American  credit  and  finance,  its  practical  utility  in  the  conduct  of 
§  American  business,  its  advantages  to  the  buyer,  seller,  retailer,  banker, 
investor  and  to  the  national  interest,  the  American  discount  market, 
discount  corporations,  expressions  and  opinions  by  specialists  on  the 
acce'")tance  method,  and  general  conclusions  as  to  the  need  for  co-op- 
eration by  all  interests  concerned,  are  the  main  features  of  Part  the 
Second.     The  operation  of  bank  acceptances,  dollar  credits,  invest- 
ments and  other  topics,  as  for  instance,   "Procedure   in   the  Use  of 
Acceptances,  Plans,  Publicity,  etc.,"  should  prove  of  interest. 

By  far  the  most  important  improvement  in  commercial  banking 
practice  has  been  the  equal  development  of  standardized  commercial 
paper,  principally  the  trade  and  bank  acceptance  as  important  elements 
of  the  American  credit  system.  The  Federal  Reserve  Board,  through 
its  few  years  of  operation,  has  broadened  the  scope  of  banking  activity 
by  the  admission  and  standardization  of  commercial  paper.  For  this 
reason,  there  is  given  practically  all  there  is  to  the  subject  of  Accep- 
tances, and  Commercial  Banking  Practice  under  the  Federal  Reserve. 
The  Amendments  to  the  Federal  Reserve  Act,  the  Rulings  and  Regu- 
lations of  the  Board,  Opinions  of  Counsel,  General  Statutory  Pro- 
visions, to  1920,  covering  Bank  and  Trade  Acceptances,  Discounts  and 
Re-discounts,  Advances,  Open  Market  Transactions  and  Investments 
are  of  great  importance  as  a  reference  work. 

Part  IV  is  an  embodiment  of  the  most  approved  forms  and  agree- 
ments on  bank  and  trade  acceptances  and  commercial  l)anking 
practice.     Each  form  is  explained  to  the  best  detail,  and  having  the 


38S146 


4-  Plan  of  Book 

stamp  of  approval  of  the  leading  commercial  and  financial  bodies  of 
the  country,  is  available  for  use  by  commercial  and  banking  establish- 
ments. 

Part  V  contains  a  collection  of  laws  relating  to  acceptances  and 
commercial  banking.  The  Negotiable  Instruments  Law  should  be  of 
particular  importance  as  a  legal  reference  on  the  subject.  The  United 
States  Warehouse  Act,  with  headings,  is  given,  as  an  aid  to  the  sub- 
ject of  bank  and  trade  acceptances.  A  Digest  of  the  Federal  Bill  of 
Lading  Act  is  also  given  for  purposes  of  reference.  The  chapter  on 
the  Taxation  of  Negotiable  Instruments  is  most  complete  as  an 
analysis  in  the  fullest  detail.  It  will  serve  to  clear  up  many  doubtful 
questions  that  have  arisen  or  may  arise  in  connection  with  the  taxa- 
tion under  the  present  Federal  Revenue  Laws  of  negotiable  com- 
mercial paper.  Lastly,  there  is  reviewed  the  Edge  Act  for  Foreign 
Financing  making  possible  a  more  extensive  credit  and  banking  pro- 
gramme abroad.  It  is  hoped  that  this  important  amendment  to  the 
Federal  Reserve  Act  will  prove  of  great  benefit  to  the  Nation  and  to 
the  further  development  and  extension  of  its  foreign  commerce. 

In  presenting  the  subjects  of  "Modern  Banking  and  Credit  Prac- 
tice," "Bank  and  Trade  Acceptances,"  and  "Commercial  Banking  and  ^ 
Credits,'  "  under  the  present  banking  system,  the  author  feels  that  it^ 
will  meet  the  needs  of  the  practical  business  man  and  the  banker  of^ 
the  country  by  giving  additional  light  upon  these  important  subjects 
and  by  outlining  their  usefulness  and  importance  to  the  manufacturer, 
producer,  the  merchants,  both  buyer  and  seller,  the  exporter,  the  im- 
porter, the  banker,  the  investor  and  the  public  in  general. 

In  preparing  this  work,  the  author  has  not  had  the  advantages  of 
others  writing  on  different  topics  of  banking  and  credits,  the  fields  of 
which  are  much  more  developed,  and  upon  which  a  good  deal  has 
already  been  written.  The  available  matter  on  Acceptances  and  the 
newer  banking  and  credit  subjects  is  very  limited  even  to  date,  and, 
with  the  exception  of  a  few  phamplets  issued  by  the  larger  banks, 
the  discussions  contained  in  which  are  very  helpful  to  a  study  of  the 
relative  subjects  nothing  of  note  has  been  availed  of.  In  the  majority 
of  cases,  research  has  been  found  necessary  by  a  study  of  actual 
methods  as  at  present  practiced. 

It  is  hoped  that  this  work  will  prove  a  useful  addition  to  the  bank 
and  commercial  library,  as  well  as  to  the  banker,  the  business  man 
and  student  of  commercial  and  financial  methods. 

New  York,  1920.  FREDERICK  SILVER. 


CONTENTS  AND  INDEX 


PART  I 

CHAPTER  I 

Money,  Banking  and  Credits 

Page 

Money,    Banking  and   Credits    33 

Commerce  in  the  primitive  ages   35 

Barter   of   commodities 35 

Other  mediums  of  exchange — commodities  and  precious  metals 35 

Employment  of  gold  and  silver  35 

Introduction  of  credit   36 

Goldsmiths  as  custodians  of  money  and  valuables   36 

Rise  of  modern  banking  36 

Development  of  credit  system   36 

Definition  of   credit    36 

Analysis  of  credit   Z7 

Credit  a  substitute  for  money   37 

Confidence  and  futurity  both  elements  of  credit 37 

Functions  of  credit  37 

The  Various  Kinds  of  Credit  38 

Various  kinds  of  credit  38 

Public    credit    38 

Capital   credit    39 

"Capital  investments"  not  capital  credit 39 

Mercantile    credit    39 

Personal  or  individual  credit 39 

Consumption   credit    39 

Retail    credit     39 

Banking  or  commercial  credit   39 

Significance  of  commercial  credit   40 

Credit  used  more  than  actual  money  40 

Banking — Various  Classes  of   Banking  Institutions 40 

The  savings  bank  40 

Character  of   savings   institutions    40 

Economic  importance  of  savings  banks 40 

Services  rendered  by  savings  banks   40 

The  investment  banker   41 

Character  of  the  investment  banker  41 

Importance  of  the  investment  banker  41 

I 


2  Contents  and  Index 

Page 

Services  rendered  by  the  investment  banker 41 

Commercial  banks   41 

Character  of  commercial  banks  41 

Importance  of  commercial  banks  to  modern  day  commerce 42 

Operations  of  commercial  banks  different  from  savings  or  investment 

banks     42 

I'he  Functions  of  Commercial  Credit  42 

Business  of  commercial  banks   42 

Loans  and  discounts    42 

Deposits    43 

Note   issues    43 

Process  of  discounting   43 

Analysis  of  above  process   44 

Cession  of  right  to  demand  a  present  sum  for  a  future  payment 44 

An  exchange  of  rights  44 

In    discounting 44 

In    deposits    44 

In  collection  items — another  means  of  making  a  deposit 44 

In  bills  of  exchange   44 

In  bank  note  issues   44 

The  Services  and  Functions  of  a  Bank 45 

Purposes  for  which  banks  are  utilized 45 

Place  where  funds  may  be  lodged  with  greater  safety 45 

Evils  existing  in  keeping  of  valuables  by  oneself  eliminated  by  bank 45 

Interest  on  deposits   45 

Utilization  of  funds  otherwise  unproductive 45 

Advances  and  loans   45 

Bank  credit  a  means  of  augmenting  one's  wealth 45 

Transmission  of  money    46 

Risk  element  in  handling  of  money  eliminated 46 

Supply  of  money  available  to  public  in  any  denomination 46 

Need  for  money  lessened  by  bank  always  having  it  for  use  of  public 46 

Eliminates  costly  handling  of  money 46 

Banks'  collection  services  valuable  aid  to  businessmen. 46 

As  guardians  of  legal  rights  in  connection  with  above 46 

Bank  connection  gives  business  reputation  47 

Bank  connection  increases  credit  standing  47 

Enables  the  keeping  of  authentic  records  47 

As  an  educator  of  banking  customs  and  better  business  methods 48 

Advisors  as  to  business  methods  and  credits  48 

Makes  for  better  morals,  produces  honesty  and  punctuality 48 

CHAPTER  II 

The  American  Banking  and  Credit  System  Before  the  Passage  of  the  Federal 

Reserve  Act 

Kinds  of  Banking  in  the  United  States 49 


Contents  and  Index  3 

Page 

Supervision  and  regulation 49 

National   Banks 49 

Introduction  of  National  Banking  System  ;  purposes ; 49 

Organization  of  the  National  Banking  System  before  the  adoption  of  the 

Federal  Reserve  50 

Capital   requirements ;   shares  and   dividends    50 

Management  of  National  Banks ;  powers  and  limitations 50 

Reserve   requirements    51 

Note  issues    51 

Government  supervision    51 

Business  conducted  by  National  Banks   52 

The  Organization,  Management  and  Supervision  of  State  Banks,  Trust  Com- 
panies and   Savings   Institutions    52 

Character  of  business    52 

Legislation ;    State   banks    52 

Supervision  of  State  banks   52 

Character  of  foreign  business  conducted  by  State  banks 53 

Private    Banks 53 

Character  of  private  banks  53 

Operations  of  private  banks   53 

The  Investment  Banker   53 

Character  of  investment  banker  54 

Operations  of  investment  banker   54 

Wider  field  permitted  by  law 54 

The  Commercial  Paper  Dealer  and  Broker 54 

Character  of  commercial  paper  dealer  and  broker 54 

Kinds  of  business  conducted  by  them 54 

Operations  of  the  commercial  paper  broker 54 

Resume  of  the  American  Banking  and  Credit  System  as  It  Existed  before  the 

Introduction  of  the  Federal  Reserve  System 54 

Scattered  reserves   55 

Effect  of  State  Laws  upon  reserves    56 

Immobility  of  reserves    56 

Bank  note  only  means  of  credit  expansion  and  contraction 56 

Cooperation  among  banks  lacking  56 

No  system  of  domestic  exchanges  56 

No  system  of  foreign  banking  operations   57 

Commercial  paper  not  of  standardized  character 57 

Limited  means  for  employment  of  funds  57 

Absence  of  a  broad  discount  market 57 

Lack  of  equality  in  credit  facilities   58 

No  agency  to  assist  in  stability  of  rates  58 

System  of  credit  expansion  poor  58 

Uniform  publicity  in  supervision  absent   58 

No    foreign   banking   facilities    58 

Defects  in  loaning  system   58 


4  Contents  and  Index 

Pace 

Defects  in  treasury  system  59 

The  National  Monetary  Commission  and  the  Aldrich-Vreeland  Bill 59 

CHAPTER  III 

Banking  in  the  United  States  Under  the  Federal  Reserve  System 

The  Federal  Reserve  System   60 

Introduction  of  the  System ;  effect  60 

Organization  of  the  Federal  Reserve,  centralized  banking   60 

The  Federal   Reserve;   organization  and  management 61 

Federal  Reserve  Board  heads  system  61 

Operation  of  the  Federal  Reserve  System 61 

The  centralization  and  mobilization  of  district  bank  reserves 61 

Use  of  reserve  money  by  Federal  Reserve  Banks 62 

Inter-district  and  intra-district  mobility  of  reserves 62 

Inter-district   Mobility  of  Reserves    62 

Rediscount  operations  of  Reserve  Banks   63 

Advances  by  one  Federal  Reserve  Bank  to  another 63 

Open  market  operations    63 

Discount  markets   for  commercial  paper 63 

The  trade  acceptance    64 

The  bank  acceptance   65 

Intra-district  Mobility  of  Reserves   65 

The  System  of  Credit  Expansion  Through  Federal  Reserve  Notes 66 

Issuance  o  f  National  bank  notes  by  banks 66 

Provisions  of  Federal  Reserve  re  note  issues 66 

Character  of  commercial  paper  67 

Security  in  the  form  of  gold 67 

Expansion  and  contraction  of  Reserve  notes  67 

Collateral   Loans    68 

Circulation  and  Contraction  of  Credit   68 

The  Domestic  Clearing  System   69 

Federal  Reserve  Banks  as  clearing  houses  for  members 69 

Operation  of  the  clearings  system  69 

The  Gold   Settlement  Fund    69 

Operation  of  Gold  Settlement  Fund  69 

How  settlements  are  effected   70 

Financing  Foreign  Trade — Dollar  Exchange    70 

Dollar  exchange  provided  for  by  Act 70 

Dollar  credits  come  into  use 70 

Importance  of  dollar  credits  to  Amercian  importer 70 

Establishment  of  foreign  agencies    71 

The  Federal  Reserve  System  and  the  Federal  Treasury  71 

Functions  of  the  Federal  Reserve  System   71 


Contents  and  Index  5 

CHAPTER  IV 

Banking  and  Credits  in  Europe 

Page 

The  Banking  and  Credit  System  of  England,  France  and  Germany 75 

Introduction    "jy 

The  Development  of  English  Commerce  and  Finance TJ 

Early  stages  of  development yj 

England  becomes  a  financial  center   78 

The  pound  sterling  78 

Banking  and  Credits  in  England 78 

Bank  of  England  the  Central  Banking  Institution 78 

Organization  of  the  English  Banking  System ;  Reserves 79 

The  Bank  of  England   79 

Joint  Stock  Banks ;  Branch  Banking  79 

Private  Bankers ;  Merchant  Banks  ;  Acceptance  Firms 80 

Discount    Houses    80 

Investing  and  Finance  Houses 80 

Commercial  Paper  in  England 80 

Classes  of  Eligible  Bills   80 

Bank  and  Trade  Acceptances  the  Chief  Forms  of  Commercial  Paper  in  Eng- 
land     81 

Bank  Acceptances  used  most  extensively  81 

Trade  Acceptances  a  most  important  form  of  commercial  credit 81 

Other  Classes  of  Commercial  Paper  and  Acceptances  82 

The  documentary  bill  of  exchange 82 

Bills  of  exchange   82 

Bills  of  exchange ;  how  classified  82 

Demand  and  sight  bills ;  short  and  long  bills 82 

Prime  bills ;   ordinary  bills    82 

Grain,  cotton  and  finance  bills ;  documentary  bills 83 

Documentary  acceptance  and  documentary  payment  bills 83 

Clean  and  secured  bills  of  exchange 83 

Finance  bill   84 

Commercial  letters  of  credit  84 

Advances  on   consignments    85 

The  London  Discount  Market   85 

What  comprises  the  great  London  money  and  discount  market 86 

Watchfulness  of  British  Banks   86 

Bank  of  England  discount  rate 86 

The  Banking  and  Credit  System  of  France  87 

The  Bank  of  France ;  creation   87 

Operation  of  the  Bank  of  France ;  reserves  87 

Credit  Societies ;  their  operation   87 

Private  banks ;  their  operations   88 

The  French  Credit  System   88 


6  Contents  and  Index 

Pack 

Services  of  the  Bank  of  France 88 

Credits  in  France ;  classes  of  eligible  paper ;  paper  discountable 88 

The  Extensive  Use  of  Acceptances  Over  the  Open  Account  Method  in  France.  89 

Superiority  of  the  acceptance  and  bill  of  exchange 89 

The  Banking  and  Credit  System  of  Germany 89 

The  German  Reichbank ;  its  operation 89 

The  Cartorium ;  Decktorium ;  and  Central  Auschuss  89 

Branch  banking  through  the  Reichbank ;  reserves 90 

Incorporated  banks   90 

Importance  of  the  Reichbank  90 

Long  term  credits ;  their  benefits  90 

The  Use  of  Acceptances  in  Germany 91 

The  bank  and  trade  acceptance 91 

Relation  of  German  banking  to  industry,  credits   91 

The  bank  acceptance ;  how  created  91 

Method  of  Financing  German  Trade  91 

PART  II 

ACCEPTANCES 

(Page  93) 

Their  Importance  in  the  Fields  of  Domestic  and  International  Trade  and 

Commerce,  and  as  a  Means  of  Creating  Better  Business  and 

Credit  Methods  for  the  Country. 


An  Extended  Survey  of  the  Acceptance,  Its  Merits  and  Demerits,  Practical 

Uses,  Benefits  to  the  Business  Community,  the  Business  Man, 

THE  Banker,  the  Investor,  and  the  Country. 


Forms,  Plans,  Methods  of  Handling  Acceptances,  Ways  and  Means  Used  to 

Encourage  Their  Use,  a  Consensus  of  Opinion  by  the  Leading 

Associations  and  Organizations. 

CHAPTER  V 

Introductory 

Historical  Aspect  of  the  Acceptance — Its  Use  in  Europe  and  the  United  States  95 

EflFect  of  Great  War  on  business    95 

American  business  man  hard  to  convince   . .  .• 95 

New  methods  looked  upon  with  suspicion 95 

The  American  in  the  field  of  specialization  9^ 

Importance  of  improved  methods  not  to  be  overlooked  9<S 

The  Acceptance;   Its  Use  and  Importance  in  the  Credit  Systems  of 'Europe..  96 


Contents  and  Index  7 

Page 

The  Acceptance  Market  in  Europe  and  the  Acceptance  as  a  Circulating  Med- 
ium Resembling  the  Use  of  Currency   96 

The  Acceptance  and  Its  Uses  in  the  United  States  before  the  Civil  War f)7 

Comparison  of  European  and  American  Methods  of  Commercial  Credit 98 

The  Introduction  of  the  Federal  Reserve  Act  and  Its  Relation  to  the  Accept- 
ance ;    Its  Re-establishment  the  Result   99 

Regulations  of  Federal  Reserve  Board  referring  to  Trade  Acceptances 99 

Definitions     100 

Character  of  Paper  Eligible   100 

Method  of  Certifying  Eligibility   lOi 

Summarized  Definition  of  Trade  Acceptance   loi 

Analysis  of  Trade  Acceptances   102 

CHAPTER  VI 

The  American  Credit  System 

An  Analysis  of  the  Modes  of  Transacting  Business,  and  the  Merits  of  Each 

System    103 

Cash  Discounts  and  Cash  Settlements  of  Bills   103 

The  Cash  Discount  System  and  Its  Drawbacks   104 

The  Open  Account  System    104 

Single  Name  Paper   105 

Single  Name  Paper  Predominates  106 


/ 


CHAPTER  VII 
Procedure  in  the  Use  of  Acceptances 


Nothing  Strange  in  Acceptance  Method   108 

Acceptance  a  Class  of  Standardized  Commercial  Paper  108 

Earlier  Substitutes  of  the  Acceptance   108 

Trade   Acceptance    109 

Purpose  of  Acceptance  109 

Acceptance  Not  Adaptable  to  Every  Kind  of  Business 109 

Acceptance  a  Scientific  Credit  Instrument  109 

Acceptance  and  Note  Distinguished  109 

Trade  Acceptance  Arises  from  Sale  of  Goods   iio 

Making  of  Sale  on  Terms  of  Trade  Acceptance  iiO 

Drawing  of  Trade  Acceptance  on  Seller  by  Buyer  IIO 

Buyer  "Accepts"  Thereby  Certifying  to  Correctness  of  Sale IIO 

Place  of  Payment    ill 

Presenting  Draft  for  Acceptance  and  Payment Ill 

Negotiation  of  Accepted  Paper    ill 

Rediscounting   of  Acceptances    I  la 

Recording  and  Accounting  lia 


8  Contents  and  Index 

Page 

Collections  and  Other  Charges  113 

Rediscount  of  Acceptances  with  Sources  other  than  Government 113 

Discharge  of  Acceptor  or  Extension  of  Time  113 

Summary  of  Procedure   113 

Comparison  between  Acceptance  and  Open  Account  114 

CHAPTER  VIII 
The  Buyer  and  the  Trade  Acceptance 

The  Buyer  Considered   II5 

Acceptance   Strengthens   Credit  Position  of  Buyer  in  the   Estimation  of  His 

Business   Associates    115 

Acceptance  Develops  Careful  Buying  n6 

Acceptance  of  Buyer  Renders  His  Credit  as  Tangible  as  Cash 116 

The  Buyer  as  the  Seller  117 

Acceptance  Affords  Buyer  Better  Terms  of  Sale  117 

Acceptance  of  Advantage  to  Smaller  Concern   118 

Acceptance  Develops  Sounder  and  More  Serious  Attitude  towards  Buyer's 

Own   Obligations    Il8 

Acceptance  Benefits  Buyer  by  Reducing  Price  of  Goods  119 

Buyer  Benefited  by  the  Extension  of  Credit  under  the  Acceptance  Method 120 

Buyer  Does  Not  Waive  Any  Legal  Rights  Against  Seller  Which  He  Would 

Otherwise  Enjoy  Under  Open  Book  Account  Method  120 

The  Buyer  and  the  Banker   120 

CHAPTER  IX 
The  Seller  and  the  Trade  Acceptance 

The  Acceptance  Provides  a  Liquid  Asset   122 

Acceptance  Relieves  Seller  from  Financing  Customer  122 

Acceptance  Creates  a  Systematic  Basis  of  Income  on  Seller's  Assets 123 

Acceptance  Tends  to  Confine  Borrowing  to  Funds  Actually  Needed 123 

Acceptances    Relieve    Seller   from    Necessity    of    Selling   of   Assigning    Open 

Book  Accounts    124 

Acceptances  Permit  Operation  of  a  So-called  "Budget  System"  of  Financing 

the    Business    124 

Acceptance  Establishes  Evidence  of  Completed  Transaction  125 

Acceptance  Effects  Economy  in  Time  and  Expense  125 

The  Acceptance  as  a  Means  of  Gauging  More  Accurately  the  Credit  Standing 

of  the   Buyer    125 

Acceptance   Strengthens  the  Seller's   Financial   Standing 126 

Acceptance  Enables  Seller  to  Offer  Bank  Better  Commercial  Paper 126 

Acceptances  No  Interference  to  Seller  or  Buyer  in  Sales 126 

Acceptance  Enables  Seller  to  Assist  Customers  by  Extension  of  Credit  without 

Obligation  on  Former    127 


Contents  and  Index  9 

CHAPTER  X 

The  Banker  and  the  Trade  Acceptance 

Page 

The  Duty  of  the  Banker  128 

Why  the  banker  should  encourage  its  use   128 

The  trade  acceptance  important  to  the  banker's  welfare   128 

The  Element  of  Risk  128 

The  acceptance  reduces  the  risk  involved  in  commercial  transactions 128 

Higher  Commercial  Standing  of  Acceptances   128 

Acceptance  Requires  Less  Credit  Re-extension   129 

Self-Liquidity  of  Trade  Acceptances    129 

Rediscount  Privileges  of  the  Banker  129 

Limitation  as  to  Discount  of  Commercial  Paper  for  Any  One  Party  Not  Ap- 
plicable to  Trade  Acceptances   130 

Assistance  to  Banks  in  Credit  Matters    131 

Prevention  of  Assignment  of  Book  Accounts   131 

Assistance   in  Judging   Customers    131 

The  Acceptance  as  a  Basis  of  a  Liquid  Currency  132 

Acceptance  Creates  More  Business  for  Banks   133 

Acceptance  Benefits  Local  Community,  whereby  Bank  is  Directly  Benefited 133 

The  Acceptance  Acts  as  an  Economizer  of  Time  and  Expense 133 

The  Banker  Considered  from  the  Standpoint  of  Investments  in  Acceptances...  134 

CHAPTER  XI 

The  Consumer,  the  Retailer  and  the  Trade  Acceptance 

The  Financing  of  Time  Payment  Sales  135 

The  retail  trade  acceptance   135 

Practical  Working  of  the  Plan  135 

Arranging  with  the  acceptance  corporation   135 

Instructions  to  all  factors  in  the  transaction   135 

Dealer  required  to  give  financial  statement  to  acceptance  corporation 136 

Forms  used  in  plan    136 

The   retail   trade   acceptance    136 

The  conditional  sale  agreement   136 

Advertising  the   plan    136 

Principles  Involved  in  the  Working  of  the  Plan  136 

Particulars  in  the  transaction   136 

The  transaction  in  figures    137 

Procedure  as  to  the  customer    137 

Procedure  as  to  the  dealer  137 

Procedure  as  to  the  acceptance    corporation     137 

Manufacturer  or  Dealer  Considered    137 

The  Bank  or  Acceptance  Corporation  Considered  138 

The   Customer   Considered    138 

Possible  Extent  to  Which  Plan  is  Capable  of  Being  Worked 138 


•10  Contents-  and  Index 

CHAPTER  XII 

Miscellaneous  Points  of  Advantages  to  Users  of  the  Trade  Acceptance  Plan 

Page 

Credit  Investigation  Always  Necessary  139 

Credit  of  parties  to  the  bill  should  always  be  investigated 139 

Trade  Acceptances  Intended  for  Current  Transactions  Only 139 

Trade  acceptance  should  represent  current  transactions  only 139 

Renewals  Should  Not  Be  Encouraged  139 

'  Acceptance  Does  Not  Imply  the  Granting  of  Longer  Term  Credits 140 

Acceptance  Should  Be  Introduced  to  All  Alike  140 

Guarding  Against  Fraudulent  Acceptances    141 

Publicity  in  Acceptance  Should  be  Extended  Liberally   141 

CHAPTER  XIII 

The  Legal  Phase  of  the  Acceptance — A  Review  of  Practical  Questions  ano 
Answers  on  the  Trade  Acceptance  Method 

Trade  Acceptance  an  order  to  bank  to  pay 142 

Laws  in  relation  to  acceptance  as  an  order  to  pay  142 

The  Negotiable  Instruments  Law  and  its  relation  to  the  acceptance 142 

Conclusion — Acceptance  generally  an  order  to  pay   143 


^\        Questions  and  Answers 


1.  Meaning  of  the  Trade  Acceptance  System  143 

2.  The  Trade  Acceptance  defined  143 

3.  The  purpose  of  the  Trade  Acceptance 144 

4.  The  general  advantage  of  the  Trade  Acceptance 144 

5.  Distribution  between  the  Trade  Acceptance  and  the  Promissory  Note 144 

6.  Distinction  between  the  Trade  Acceptance  and  the  Draft  144 

7.  Objections  to  the  "open  book  account"  system 144 

8.  Chief  objections  to  single  name  paper  145 

9.  Disadvantages  of  single  name  paper  in  the  hands  of  the  banker 14S 

9.  The  Trade  Acceptance  used  to  express  a  credit  obligation 14S 

10.  How  the  Trade  Acceptance  is  used  in  a  merchandise  transaction 145 

11.  Advantages  of  the  Trade  Acceptance  in  the  hands  of  the  banker 146 

12.  The  seller,  the  trade  acceptance  and  the  note  146 

Reasons  why  buyers  should  give  acceptances 147 

13.  Method  of  introducing  the  trade  acceptance  by  the  seller  147 

14.  Extent  of  employment  of  the  Trade  Acceptance  147 

15.  Advantages  buyer  derives  from  the  Trade  Acceptance  method 148 

16.  Advantages  seller  derives  from  the  Trade  Acceptance  method 148 

17.  Advantages  banker  derives  from  the  Trade  Acceptance  method 149 

18.  Advantages  of  Trade  Acceptance  system  to  business  in  general 150 


Contents  and  Index  ii 

Pagb 

19.  Evils  in  business  which  the  Trade  Acceptance  system  would  remedy 150 

20.  Acceptance  does  not  eliminate  the  promissory  note 150 

21.  Effect  of  Trade  Acceptance  upon  credit  151 

Procedure 

22.  Acceptances — where  payable   151 

23.  Acceptance  ordinarily  discounted  by  seller   151 

24.  Discounting  of  Trade  Acceptance  by  buyer  151 

25.  Acceptance  treated  as  check  and  as  an  order  to  pay 151 

The  Federal  Reserve  and  Acceptances 

27.  Attitude  of  Federal  Reserve  Board  towards  acceptances   152 

28.  Advantages  offered  by  Federal  Reserve  System  as  inducement  to  use  of 

acceptances    152 

29.  Eligibility  and  requirements  of  eligibility  152 

30.  Requirements  by  Federal  Reserve  banks  as  to  evidence  of  eligibility 152 

CHAPTER  XIV 

Methods  of  Introducing  the  Acceptance 

Method  of  direct  appeal ;   buyer  must  be  shown  not  forced 153 

Extending  the  use  of  acceptances  through  salesmen 153 

House   organs    154 

Through  facts  and  figures   154 

Considering  the  buyer   154 

Giving  of  extra-considerations  not  always  necessary   154 

Publicity  methods  in  the  Use  of  Acceptances   155 

Form  of  slip  attached  to  Trade  Acceptance  forwarded  to  buyer 155 

Explanatory  letter  used  as  publicity   15S 

Other  forms  of  explanatory  letters    156 

Poster  "Fair-Play"  between  buyer  and  seller 157 

Methods  of  one  bank   158 

Explanatory  letters  used  by  one  bank  159 

CHAPTER  XV 

Pbogress    in    the    Acceptance    Method — For    and    Against — Expressions    and 

Opinions  From  the  Leading  Commercial  and  Financial  Organizations, 

the  Government,  Bankers  and  Specialists  on  the  Acceptance 

Method 

From  the  Government   162 

From  the  Commercial,  Financial  and  Credit  Organizations   163 


12  Contents  and  Index 

Page 

From  the  American  Bankers'  Committee  on  Acceptances 163 

From  proponents  of  the  Acceptance  Method   164 

A  Trade  Acceptance   Review    166 

The  Other  Side  of  the  Question 

From  a  large  Manufacturing  Company   169 

CHAPTER  XVI 

Importance  of  the  Acceptance  to  the  National  Interest 

"Modernization  of  the  Credit  Structure   172 

Liquidity  of  the   Nation's   resources   made  possible   by  the  extension   of  the 

Acceptance   method    172 

Advantages  to  the  buyer,  seller  and  banker  equally  advantageous  to  the  Na- 
tional   interest    173 

The  Acceptance  as  a  factor  in  national  preparedness 173 

"Welfare  of  Nation  linked  with  its  credit  system    173 

The  acceptance  in  the  field  of  commercial  credit 173 

£ank    Acceptances — Their    History,    Practical    Uses,    Operation    Under    the 

Federal  Reserve  Act,   Advantages,   Eligibility,   Discounts,   Markets, 

Discount  Corporations,  Dollar  Credits,  Investments,  etc.,  etc. 

CHAPTER  XVII 

Bank   Acceptances 

Banking  Credit   '. I77 

The   Bank  Note    178 

The   Bank    Draft    178 

The   Bank  Acceptance    178 

Historical  Aspect  of  the  Bank  Acceptance  179 

England  the  first  country  to  develop  sound  banking  system 179 

The    London    Merchant    Bankers     I79 

Acceptance  business  firmly  established 180 

France  and  Germany   180 

First  efforts  to  establish  Acceptance  business  unsuccessful 180 

The  Bank  Acceptance  today  is  used  in  most  important  countries  of  Europe..   181 

The  Bank  Acceptance  in  America  182 

Creation  of  Bank  Acceptances  in  the  United  States  made  possible  by  adoption 

of  Federal  Reserve  System    182 

Beginnings  of  the  American  Bank  Acceptance   182 

CHAPTER  XVIII 

Bank  Acceptances 

Definition  of  Bank  Acceptance   184 

Trade  and  Bank  Acceptances  distinguished    184 


Contents  and  Index  13 

Pack 

Bank  Acceptances ;    how  created  184 

Distinction  between  a  bank's  Acceptance  and  a  bank's  note 184 

Credit  standing  of  Bank  Acceptance  based  upon  bank's  credit 184 

Acceptances  by  member  banks  of  the  Federal  Reserve  System 185 

Bills  drawn  to  furnish  dollar  exchange    185 

Applications    for   privilege    of   accepting    required    to    be    filed    with    Federal 

Reserve    Bank    186 

Limitations  as  to  amount  which  any  one  Member  bank  may  accept 1S6 

Purchase  by  Member  bank  of  its  own  Acceptances 186 

Eligibility  of  Bankers'  Acceptances  for  rediscount  with  the  Federal   Reserve 

Banks    187 

Rediscount  by  Federal  Reserve  Banks  of  Acceptances 187 

General  character  of  eligible  instruments    187 

Applications  for  rediscount  required  from  Member  banks  by  Federal  Reserve 

Bank 188 

The  discount  of  Bankers'  Acceptances   .• 188 

Eligibility  of  Bankers'  Acceptances    188 

Evidence  of  eligibility  of  Bankers'  Acceptances  189 

CHAPTER  XIX 

Procedure  of  Financing  Imports  Through  Dollar  Credits — Creation  of  Bank 

Acceptances 

Dollar    Acceptances    igo 

Example  of  transaction  involving  the  use  of  Dollar  Acceptances 190 

The  transaction   analyzed    190 

Application  for  a  Commercial  Credit   190 

Issuance  of  Letter  of  Credit 191 

Form  of  Letter  of  Credit 191 

Form  of  Agreement    193 

Shipping  of  goods  and  drawing  of  draft 193 

Course  of  draft-purchase  of  foreign  bank  194 

Advantages  to  seller   abroad 194 

Advantages  to  New  York  bank  194 

Further  course  of  draft  194 

The  Trust  Receipt   195 

Self-liquidity  of  Acceptances  195 

The  advantages  of  Dollar  Credits  to  Importer  195 

The  financing  of  Imports  through  Dollar  Acceptance  Credits 195 

Elimination  of  risk  in  exchange   196 

Benefits  of  the  money  rates  quoted  in  the  New  York  market 196 

Advantages  of  direct  service  197 

CHAPTER  XX 

Procedure  of  Financing  Exports  Throuh  Dollar  Acceptance  Credits 

Dollar    Acceptances    19B 


14  Contents  and  Index 

Pass 

Transaction  outlined  in  detail    198 

Purpose  of  Origin  of  Bank  Acceptances 199 

Advantages  of  Dollar  Credits  to  parties  to  transaction v . .  200 

Economic  value  to  Nation  accruing  from  the  use  of  Dollar  Credits 201 

CHAPTER  XXI 

Acceptance  Corporations — Their  Importance  to  the  Development  of  a  Dis- 
count Market 

Effect  of. the  Federal  Reserve  Act  on  the  American  Bank  Acceptance 202 

Pre-existing    conditions     203 

Effect  of  war  upon  Bank  Acceptances  203 

Substantial  enlargement  of  facilities  in  connection  with  American  foreign  trade 

becomes   necessary    203 

Rise   of    Acceptance    Corporations 204 

Restrictions  on  activities  of  Acceptance  Corporations  204 

Powers  of  Acceptance  Corporations    204 

Creation  of  new  Acceptance  Corporations  205 

Effect  of  Call  Loan  system  to  Acceptance  growth 206 

The  New  Edge  Act  for  foreign  financing 206 


nI 


CHAPTER  XXII 


The  Development  of  an  Open  Discount  Market — The  Importance  of  Accept- 
ances AND  High  Grade  Commercial  Paper  to  the  Maintenance  of  a 
System  Which  More  Than  Anything  Else  Furnishes  a  Basis 
FOR  Establishing  the  National  Ideal  of  a  Liquid  Currency 

The  introduction  of  the  Federal  Reserve  System  prepares  way  for  American 

discount   market    208 

Maintenance  of  American  discount  market  sought  to  be  brought  about  by  Ac- 
ceptances and  high  grade  commercial  paper  208 

Functions  of  a  discount  market — the  open  discount  market 208 

Importance  of  a  discount  market  to  efficient  banking  system 208 

The  discount  market  as  a  reservoir  of  the  country's  funds 209 

Performs   functions  of  buyer  and  seller 209 

Discount  market  makes  mobility  possible 209 

Equalizing  interest  and  discount  rates  within  the  country 210 

The   discount  market  as  an  equalizer  of  discount   rates   between  the  United 

States  and  Foreign  Countries    210 

The  discount  market  as  a  stabilizer  of  interest  rate  levels  within  the  country..  211 

The  discount  market  as  a  stabilizer  of  gold  movements  between  countries 211 

What  is  necessary  to  the  maintenance  of  a  discount  market 212 

Essential  features  of  a  broad  discount  market 213 

The  Acceptance  as  a  secondary  reserve 214 


Contents  and  Index  15 

Page 

As  a  liquid  investment 21? 

The  American  discount  market  and  its  development 216 

The  discount  market  as  it  exists  to-day 217 

CHAPTER  XXIII 

Acceptances  as  Investments 

Acceptance  a  new  form  of  short  term  investment 219 

Used  extensively  in  Europe    219 

Importance  of  the  Federal  Reserve  Act  to  Acceptances  219 

Privileges  afforded  banks  as  to  accepting  and  investing 219 

The  work  of  the  commercial  paper  brokers 220 

Other  methods  of  dealing  in  commercial  paper  220 

Acceptance  a  favorable  item  of  investment 220 

Example  of   use    221 

Discount    Corporations    221 

The  Federal  Reserve  Banks  and  their  investments  in  Acceptances 221 

Other  factors  in  the  Acceptance  investment  business 221 

The  Acceptance  as  an  investment  analyzed  222 

Availability  of  trade  and  bank  Acceptances  222 

The  Acceptance  as  an  equalizer  of  the  bank's  cash  and  investment  position 222 

Liquidity    of    Investments    222 

Acceptances  as  short-time  investments 223 

The  Trade  Acceptance    223 

CHAPTER  XXIV 

Conclusion 

The  need  for  wholehearted  co-operation  224 

Time    required     224 

The   banker   reviewed    224 

The   seller    225 

The    buyer     225 

Business  men  must  co-operate   225 

The   Government    226 

The  banker    226 

PART   III 

COMMERCIAL  BANKING  AND  CREDITS— BANK  AND   TRADE  AC- 
CEPTANCES 

General  Introduction 

Acceptances  Arising  out  of  a  Transaction  Involving  the  Importation  or  Expor- 
tation of  Goods   230 


i6  Contents  and  Index 

Pack 

Example  of  an  importation  acceptance;  procedure 230 

Example  of  an  exportation  acceptance;  procedure 232 

Acceptances   Arising  out  of   Transactions   Involving   the  Domestic   Shipment 

of   Goods    232 

Acceptances  Secured  by  Readily  Marketable  Goods  in  Warehouse 233 

Drafts  Drawn  for  the  Purpose  of  Furnishing  Dollar  Exchange 234 

Trade  Acceptances   234 

SECTION  I 
Bank  and  Trade  Acceptances 

Acceptances  Based  upon  Transactions  Involving  the  Exportation  or  Importa- 
tion of  Goods  235 

General  statutory  provisions    235 

Use  of  acceptances  in  foreign  trade   235 

Opinions  of  counsel  and  rulings   235 

Character  of  transactions  on  which  acceptances  are  based 235 

Indentification  of  specific  goods  not  required   235 

Transactions  must  involve  imports  or  exports  of  goods,  otherwise  in- 
sufficient     236 

Drafts  treated  as  drawn  in  domestic  transactions 236 

Option  to  secure  drafts  as  in  domestic  transactions  236 

Goods  ultimately  intended  for  export  insufficient  basis 236 

Acceptance  at  the  instance  of  exporter  236 

Goods  purchased  subsequent  to  acceptance 236 

Acceptances  against  future  importation  of  goods   236 

Delay  in  shipment  of  goods  is  immaterial   237 

Acceptance  of  drafts  when  export  contract  not  fulfilled 237 

Drafts  drawn  against  collateral  of  acceptances 237 

Acceptance  agreements  of  dealers  in  same  goods  for  export  and  do- 
mestic sale   238 

Acceptances  against  gold  coin  and  bullion  238 

Maturity  relating  to  bank  acceptances  based  on  imports  and  exports 238 

General  statutory  provisions   238 

Period  of  maturity  238 

Opinions  of  counsel  and  rulings  relating  to  maturity  of  bank  acceptances 

based  on  imports  and  exports   238 

Duration  of  acceptance  credits  may  exceed  six  months 238 

Renewals  of  bank  acceptances  permitted  to  be  made   for  reasonable 

periods     239 

Amount  bank  may  accept  for  one  interest 239 

General  statutory  provisions  in  connection  with  the  above  relating  to  bank 

acceptances  based  on  imports  and  exports  239 

Limitation  of  amount ;  exception    239 

Opinions  of  counsel  and  rulings  relating  to  amount  bank  may  accept  for 
one  interest  on  transactions  involving  exports  and  imports  239 


Contents  and  Index  17 

Pagb 

Secured  bills ;  accepting  bank  must  remain  secured 239 

What  constitutes  actual  security  240 

Trust  receipts  as  actual  security  240 

Effect  and  relation  of  U.  S.  Revised  Statutes,  Section  5200,  to  the  ten 

percent,  limit ;  its  application 240 

Acceptances  in  addition  to  loans ;  exception 240 

When  drawer  fails  to  provide  funds  to  meet  acceptance 241 

Aggregate  amount  bank  may  accept   241 

General  statutory  provisions  in  connection  with  the  above  relating  to  trans- 
action based  on  the  importation  or  exportation  of  goods 24X 

Limitation  of  amount,  fifty  per  cent 241 

Regulations  of  the  Federal  Reserve  Board  in  connection  with  aggregate 

amount  bank  may  accept  241 

Application  required  to  be  filed  with  Board  for  power  to  accept  up  to 

one  hundred  per  cent 241 

Report  on  application  to  be  made  by  Federal  Reserve  Bank  to  the 

Board     242 

Reversal  of  approval   242 

Opinions  of  counsel  and  rulings  in  connection  with  aggregate  amount  bank 

may    accept    242 

No  requirement  of  permission  necessary  to  accept  up  to  fifty  percent.  242 

Acceptances  of  correspondents  under  guaranty  of  national  banks 242 

Bank  purchasing  own  acceptances    242 

Limitations  of   Section   5202 242 

Summary  of  bank  acceptances  based  on  imports  and  exports 243 

Bank  Acceptances  Executed  to  Furnish  Dollar  Exchange  244 

General  statutory  provisions   244 

Acceptances  executed  to  furnish  dollar  exchange 244 

Regulations  of  the  Federal  Reserve  Board   in  connection   with  bank  ac- 
ceptances executed  to   furnish  dollar  exchange 244 

Application  for  permission  to  accept 244 

Conditions  upon  which  approval  will  be  made 244 

Announcements  of  the  Federal  Reserve  Board   245 

Maturity  in  connection  with  bank  acceptances  executed  to  furnish  dollar 

exchange    245 

Period  of  maturity   245 

Amount  acceptable  by  one  member  bank  for  one  interest 245 

Limitation   o  f   percent 245 

Aggregate  amount  member  bank  may  accept  in  connection  with  bank  ac- 
ceptances executed  to  furnish  dollar  exchange  246 

Limitation  of  percent 246 

Opinions    of    counsel    and    rulings    in    connection    with    aggregate   amount 

bank  may  accept    246 

Separate  limit  on  the  two  classes  of  acceptances  246 

Bank  Acceptances  Based  on  Domestic  Shipments  of  Goods 247 

General    statutory    provisions    247 


i8  Contents-  and  Index 

Bank  acceptances  in  domestic  trade  247 

Opinions  of  counsel  and  rulings  relating  to  bank  acceptances  based  on  do- 
mestic shipments  of  goods  247 

Shipping   documents    247 

Documents  not  required  to  be  physically  attached 247 

Transaction  not  required  to  involve  sale  of  goods 247 

Acceptance  must  arise  out  of  actual  transaction  248 

Retention  or  release  of  shipping  documents  against  acceptance 248 

Retention  or  release  of  warehouse  receipts  against  acceptance 248 

Maturity   in   connection   with   bank  acceptances   based   on   domestic   ship- 
ments   of    goods    248 

General    statutory   provisions    248 

Period  of   maturity    248 

Opinions  of  counsel  and  rulings  in  connection  with  maturity  of  bank  ac- 
ceptances based  on  domestic  shipments  of  goods 249 

Duration  of  letters  of  credit  249 

Aggregate  amount  bank  may  accept   249 

Aggregate  amount  bank  may  accept  up  to  one  hundred  per  cent 249 

Opinions  of  counsel  and  rulings  relating  to  aggregate  amount  bank  may 

accept    249 

Bank  purchasing  own  acceptances  249 

Section  5202  inapplicable  to  acceptances   249 

Bank  Acceptances  Secured  by  Warehouse  Receipts 250 

General  statutory  provisions   250 

Acceptances  by  member  banks    250 

Opinions  of  counsel  and  rulings  relating  to  bank  acceptances  secured  by 

warehouse  receipts ;  eligible  security   250 

Warehouse  receipts  required  to  be  issued  by  warehouses  independent 

of   borrower    250 

Relation  between  warehouse  corporation  and  borrower 250 

Control  of  warehouse  by  acceptor's   representatives 251 

Warehouse  receipts  issued  by  lessee 251 

Receipts  of  custodian  of  wool  as  a  warehouse  receipt  251 

Ineligible  security    252 

Chattel  mortgages   252 

Collateral  notes  secured  by  chattel  mortgages 252 

Bills  of  sale   352 

Security  not  specified  252 

Substitution  of  warehouse  receipts   252 

Substitution     252 

Maturity     253 

Amount  bank  may  accept  for  one  interest 253 

Aggregate  amount  bank  may  accept  253 

Investments  in  Acceptances  by  Member  Banks   254 

General   statutory   provisions ;   U.    S.   Revised   Statutes,    Section   5200,   as 

amended    254 

Ten  percent,  limit  on  liability  of  any  one  interest  to  a  national  bank; 


Contents  and  Index  19 

Pack 
exception    254 

Opinions  of  counsel  and  rulings  in  connection  with  investments  in  accept- 
ances by  member  banks   254 

Purchase  or  discount  of  acceptances  of  other  banks 254 

Bills  of  exchange  include  bank  acceptances  254 

Bills  discounted  before  acceptance   255 

Bills  secured  by  shipping  documents  or  pledge  of  goods 255 

Bills  discounted  after  acceptance  255 

Acceptances  discounted  after  removal  of  attached  documents 255 

Discount  of  acceptances  as  business  paper   ^  255 

Purchase  by  national  bank  of  its  own  acceptances 256 

Bank  permitted  to  purchase  its  own  acceptances  256 

Exemptions  from  limitations  of  Section  13 256 

Reissue  of  acceptances   256 

Rediscount  of  such  acceptances   256 

Syndicate   acceptance   credits    257 

Policy  of  Federal  Reserve  Board  257 

Authorization ;  duration  of  credits ;  rate ;  character ;  approval  of  Fed- 
eral Reserve  Board   257 

Quantity  as  well  as  quality  the  controlling  factors  257 

SECTION  II 
Transactions 

Open  Market  Transactions  in  Acceptances,  Bills  of  Exchange  and  Cable  Trans- 
fers      259 

General  statutory  provisions   261 

Cable  transfers,  bank  acceptances  and  bills  of  exchange 261 

Commercial    bills     261 

General  regulations  and  rulings  relating  to  open  market  transactions 261 

Conditions  governing  eligibility   261 

Opinions  of  counsel  and  rulings  relating  to  open  market  transactions 262 

Promissory  notes  not  included    262 

Eligible   paper    262 

Promissory  notes  not  eligible  263 

Eligibility  of  commodity  paper  263 

Transactions  in  bank  acceptances  in  the  open  market 263 

Definition  of  bankers'  acceptances 263 

Eligible  bank  acceptances   263 

General  statutory  provisions   263 

Cable  transfers  and  bankers'  acceptances  263 

Regulations  of  the  Federal  Reserve  Board  263 

Conditions  governing  eligibility   263 

Opinions  of  counsel  and  rulings  relating  to  eligible  bank  acceptances 264 

Accepted  commercial  paper  secured  by  bullion  shipments 264 

Ineligible  bank  acceptances    264 


20  Contents  and  Index 

Page 

Opinions  of  counsel  and  rulings 264 

Acceptances  not  based  on  sales  and  not  secured,  ineligible 264 

Acceptances  secured  by  bill  of  sale  ineligible 265 

Bills  payable  outside  the  United  States  ineligible 265 

Evidence  of  eligibility  and  requirement  of  statements 265 

Regulations  of  the  Federal  Reserve  Board  265 

Evidence  of  eligibility,  exception  of  bills  accepted  by  national  banks  . .  265 

Requirement  of  statements    265 

Opinions  of  counsel  and  rulings  relating  to  evidence  of  eligibility  and  re- 
quirement of  statements  266 

Responsibility  for  eligibility;  statement  required  to  be  satisfactory  in 

form    266 

Maturity    266 

General   statutory   provisions    266 

Maturity 266 

Regulations  of  the  Federal  Reserve  Board  266 

Requirements  as  to  maturity  266 

Transactions  in  bills  of  exchange  and  trade  acceptances 266 

Definition  of  bill  of  exchange  266 

Definition   of   trade  acceptance    266 

Eligible  bills  and  trade  acceptances 267 

General  statutory  provisions 267 

Eligible    bills    267 

Regulations  of  the  Federal  Reserve  Board  267 

General  conditions  of  eligibility    267 

Ineligible  bills  and  trade  acceptances 267 

Regulations  of  Federal  Reserve  Board  267 

Finance   paper    267 

Opinions  of  counsel  and  rulings  relating  to  ineligible  bills  and  trade  accept- 
ances      268 

Drafts  drawn  on  corporation  by  agent  ineligible 268 

Paper  stamped  "trade  acceptance"  of  no  value  as  such 268 

Evidence  of  eligibility  and  requirement  of  statement 268 

Regulations  of  Federal  Reserve  Board  268 

Evidence  of  eligibility ;  requirement  of  statements  268 

Maturity    268 

General  statutory  provisions  and  regulations  of  the  Federal  Reserve  Board.  268 

SECTION  III 

Advances 

Advances  by  Federal  Reserve  Banks 265 

General  statutory  provisions   271 

Maturity ;  security ;  eligible  paper ;  U.  S.  obligations  271 

Advances  on  bonds  or  note  of  the  United  States 271 


Contents  and  Index  21 

Pack 

Opinions  of  counsel  and  rulings  relating  to  security  on  advances  by  Federal 

Reserve   Banks    271 

Indorsement  of  collateral   271 

Collateral  of  Government  bonds   272 

County  warrant   ineligible    272 

Farm  loan  bonds  ineligible   272 

Maturity    272 

General    statutory   provisions    272 

Period  for  which  advances  may  be  made 272 

Opinions  of  counsel  and  rulings   272 

Notes  due  on  Sunday  or  legal  holiday  272 

Renewals    272 


K" 


SECTION  IV 
Rediscounts 


Rediscounts  of  Acceptances,  Drafts  and  Bills  of  Exchange  with  the  Federal 

Reserve    Banks    275 

General  statutory  provisions    277 

Rediscount  of  notes,  drafts,  bills  of  exchange,  commercial,  agricultural 

and  commodity  paper    277 

Classes  of  ineligible  paper  277 

Maturity  of  eligible  paper   277 

Amount  rediscountable  by  one  bank  for  any  one  interest 278 

Bank  acceptances  eligible  for  rediscount  278 

Rediscounts  for  member  State  bank 278 

Conditions  attached  to  rediscounts  by  Federal  Reserve  Banks 278 

Discounts  for  non-members 279 

Discounts  and  rediscounts  subject  to   regulations  of  Federal  Reserve 

Board    279 

Applications  for  rediscount ;  requirement  of  certificate  of  member  banks  279 

Rediscount  of  promissory  notes  279 

Definition  of  promissory  note  279 

Classes  of  notes  eligible   279 

General  statutory  provisions   279 

Commercial  paper ;  definition  of  eligible  notes 279 

Agricultural  and  commodity  paper 280 

Paper  based  on  United  States  obligations   280 

Regulations  of  the  Federal  Reserve  Board  relating  to  eligible  classes  of 

promissory  notes   280 

Definition  of  commercial  paper  eligible  for  rediscount  280 

Opinions  of  counsel  and  rulings  relating  to  eligible  classes  of  promissory 

notes     280 

Loans  to  individuals   280 

Notes  based  on  production  and  distribution  of  goods 280 

Papers  of  waterworks  company  280 


22  Contents  and  Index 

Pack 

Notes  of  farmers   281 

Assignment  of  open  accounts  ineligible  281 

Discount  of  renewal  notes    281 

Secured  notes ;  eligibility  tested  by  use  of  funds  281 

Notes  secured  by  collateral   281 

Collateral  of  mortgages    282 

Paper  secured  by  bills  receivable 282 

Eligible  security  not  sufficient   282 

Offerings  considered  upon  their  merits;  rediscounts  for  insolvent  banks  282 

Notes  secured  by  food  products   283 

Notes  secured  by  pig-iron   282 

Notes  based  on  United  States  obligations   282 

Relation  of  maturity  to  eligibility  283 

Notes  of  non-member  bank   283 

Classes  of  notes  ineligible   283 

General   statutory   provisions    283 

Security  paper  ineligible   283 

Regulations   of   Federal   Reserve   Board   relating   to   ineligible  classes   of 

promissory  notes    284 

Notes  for  permanent,  fixed  or  speculative  investments 284 

Opinions  of  counsel  and  rulings  relating  to  ineligible  classes  of  promissory 
notes     284 

Renewals  and  extensions   284 

Discount  of  renewal  notes 284 

Extension  of  time  284 

Financial  paper;  notes  to  replace  funds  withdrawn  ineligible 284 

Paper  secured  by  War  Savings  Stamps ;^  284 

Notes  of  finance  companies  285 

Notes  of  acceptance  houses  or  brokers  285 

Collateral  trust  notes  undesirable  285 

Collateral  of  bills  receivable  285 

Bills  payable  with  collection  charges  285 

Exchange  and  collection  charges  distinguished   285 

Charges  before  and  after  maturity  285 

Evidence  of  eligibility  and  requirement  of  statements 286 

Regulations  of  the  Federal  Reserve  Board 286 

Evidence  of  eligibility  286 

Financial  statements    286 

Opinions  and  rulings  relating  to  evidence  of  eligibility  and  requirement  of 

statements     287 

Paper  of  cotton  mills  287 

Unmined  minerals  are  not  regarded  as  quick  assets ;  standing  timber 
not  regarded  as  quick  assets  287 

Maturity  of  notes  eligible  for  rediscount  287 

General  statutory  provisions   287 

Commercial,  agricultural  and  live  stock  paper 287 


Contents  and  Index  23 

Page 
Opinions  of  counsel  and  rulings  relating  to  maturity  of  promissory  notes  eli- 
gible for  rediscount  287 

Notes  payable  on  or  before  a  certain  date 287 

Demand  notes  not  eligible   288 

Notes  payable  before  a  certain  date 288 

Extension  of  time  on  notes  or  drafts 288 

Direct  loans  and  discounts  distinguished 288 

Regulations  of  the  Federal  Reserve  Board  relating  to  maturity  of  promis- 
sory notes  eligible  for  rediscount   288 

Maturity  of  notes,  drafts,  bills  of  exchange  and  agricultural  paper 288 

Amount  of  paper  of  one  interest' rediscountable  for  one  member  bank 289 

General  statutory  provisions   289 

Limitation  of  amount ;   exception    289 

Limitation  of  rediscounts   for  member  State  banks 289 

Conditions  governing  discount  of  notes,  drafts  and  bills  of  exchange 

for  State  banks  or  trust  companies 289 

Regulations  of  the  Federal  Reserve  Board  in  connection  with  amount  of 

paper  of  one  interest  rediscountable  for  one  member  bank 290 

Ten  percent,  limit  and  exceptions   290 

Opinions  of  counsel  and  rulings  in  connection  with  amount  of  paper  of  one 

interest  rediscountable  for  one  member  bank 290 

Limitation  of  amount  rediscountable 290 

Discount  of  paper  for  one  maker  or  indorser 290 

Not  applicable  to  rediscounting  bank   290 

Paper  of  cotton  broker  290 

Limitation  of  amount  of  commercial  or  business  paper  rediscountable  and 

its  relation  to  Section  5200  of  the  Revised  Statutes  291 

Commercial  or  business  paper   291 

Rediscounted  paper  not  included  in  aggregate  amount 291 

Aggregate  amount  rediscountable  for  one  bank 292 

General    statutory    provisions 292 

Indebtedness  of  national  bank  292 

Rediscount  subject  to  regulations  of  Federal  Reserve  Board 292 

Opinions  of  counsel  and  rulings  relating  to  aggregate  amount  of  promissory 

notes    rediscountable    for   one   bank 292 

No  limitation  by  law  of  commercial  paper  rediscountable  292 

Discretion  of  Federal  Reserve  bank   292 

Indorsement  of  member  banks  in  connection  with  rediscount  of  promissory 

notes     292 

General  statutory  provisions   292 

Indorsement    292 

Opinions  of  counsel  and  rulings  in  connection  with  indorsement  of  member 

banks    293 

Indorsement  as  waiver   293 

Effect  of  note  bearing  "without  recourse"  293 

Rediscount  for  non-member  bank  in  connection  with  promissory  notes 293 


24  Contents  and  Index 

Pack 

General  statutory  provisions  393 

Rediscounts  for  non-members   393 

Opinions  of  counsel  and  rulings  relating  to  rediscount  of  promissory  notes 

for  non-member  banks    293 

Rediscount  of  paper  acquired  from  non-member  banks 293 

Rediscount  of  paper  indorsed  by  non-member  bank 294 

Rediscount  of  drafts  and  trade  acceptances  294 

Regulations  of  Federal  Reserve  Board    294 

Definition  of  draft  or  bill  of  exchange  294 

Opinions  of  counsel  and  rulings  relating  to  the  rediscount  of  drafts  and 

trade  acceptances   295 

Extension  of  time  for  notes  or  drafts  295 

Presentment  of  bills  for  acceptance    295 

Acceptor  not  affected  by  waiver  295 

Negotiability  of  drafts  and  trade  acceptances  295 

Effect  of  waivers   295 

Drafts  payable  on  condition  295 

Drafts  payable  with  interest   , 295 

Charges  before  and  after  maturity  295 

Exchange  and  collection  charges   296 

Drafts  payable  to  order  of  drawee  296 


^ 


SECTION  V 
Trade  Acceptances 


Trade    Acceptances    297 

Regulations  of  the  Federal  Reserve  Board  297 

Definition    297 

Opinions  of  counsel  and  rulings  relating  to  trade  acceptances 297 

Acceptance  by   drawee    297 

Place  of  payment  of  acceptance  297 

Discount  for  prepayment   297 

Discount  for  payment  at  maturity   297 

Eligible  drafts  and  trade  acceptances   297 

General    statutory   provisions    297 

Definition  of  eligible  paper   297 

Regulations  of  Federal  Reserve  Board  relating  to  eligible  drafts  and  trade 

acceptances     298 

Conditions  governing  eHgibility   298 

Opinions  of  counsel  and  rulings  relating  to  eligible  drafts  and  trade  ac- 
ceptances      298 

Bills  based  on  retail  transactions   298 

Bills  based  on  sale  and  delivery  of  gas  298 

Bills  based  on  installment  plan  sales  298 

Drafts  based  on  electrical  installation   299 

Acceptances  in  liquidation  of  open  account 299 


Contents  and  Index  25 

Page 

Acceptances  of  sales  corporations    299 

Acceptances  based  on  advertising  space   299 

Acceptances  based  on  foreign  transactions ;  imports  300 

Acceptances  based  on  foreign  transactions ;  exports 300 

Ineligible  drafts  and  trade  acceptances   300 

General    statutory    provisions    300 

Security  paper  ineligible  300 

Regulations  of  the  Federal  Reserve  Board  relating  to  ineligible  drafts  and 

trade  acceptances    300 

Notes  for  permanent,  fixed  or  speculative  investments  300 

Opinions  of  counsel  and  rulings  relating  to  ineligible  drafts  and  trade  ac- 
ceptances      301 

Acceptances  based  on  future  purchases   301 

Drafts  in  payment  of  insurance  premiums  301 

Drafts  drawn  to  finance  capital  requirements  ineligible 301 

Evidence  of  eligibility   301 

Regulations  of  the  Federal  Reserve  Board  301 

Character  of  evidence   301 

Opinions  and  rulings  relating  to  evidence  of  eligibility 302 

EflFect  of  stamp  "trade  acceptance"   302 

Maturity    302 

General  statutory  provisions    302 

Commercial,  agricultural  or  live  stock  paper 302 

Regulations  of  the  Federal  Reserve  Board  relating  to  maturity 302 

Period  of  maturity ;  requirement  302 

Opinions  of  counsel  and  rulings  relating  to  maturity  302 

Drafts  payable  on  condition   302 

Drafts  payable  "on  or  before"  a  certain  date 303 

Demand    drafts    303 

Extension   of   time    303 

Amount  of  paper  of  one  interest  rediscountable  for  one  member  bank 303 

General  statutory  provisions   303 

Limitation  as  to  amount  and  acceptance  303 

Regulations  of  Federal  Reserve  Board  on  the  rediscount  of  draft  and  trade 

acceptances    303 

Limitation  as  to  amount  and  exception  303 

Opinions  of  counsel  and  rulings  on  the  rediscount  of  drafts  and  trade  ac- 
ceptances       304 

Drafts  discounted  before  acceptance   304 

Trade    acceptances    304 

Trade  acceptances  for  long  standing  open  accounts   304 

Qualified    acceptances     304 

Evidence  of  actually  existing  value   304 

Rediscounts  by  Federal  Reserve  Banks  of  six  months'  agricultural  paper..  30^ 

Regulations  of  the  Federal  Reserve  Board  306 

Six  months'  agricultural  paper  defined ;  includes  live  stock 306 


26  Contents  and  Index 

Page 
Opinions  of  counsel  and  rulings  relating  to  the  rediscount  of  six  months' 

agricultural   paper    306 

What  live  stock  includes    306 

Notes  of  cattle  dealers  merely  mercantile  306 

Notes  of  implement  dealers  not  agricultural  paper 306 

Agricultural  products  or  implements    306 

Notes  or  bills  of  packing  companies 306 

Eligible  agricultural  paper   307 

General  statutory  provisions   307 

Agricultural  and  live  stock  paper   307 

Regulations  of  the  Federal  Reserve  Board  relating  to  eligible  agricultural 

paper    307 

Conditions    governing    eligibility    307 

Opinions  of  counsel  and  rulings  relating  to  eligible  agricultural  paper 307 

Cattle  mortgages    307 

Notes   for    fertilizer    307 

Notes   for  dairy  cattle    307 

Cattle  for  breeding,  grazing  or  fattening  308 

Farmers'   notes    308 

Notes   for   farm  tractors    308 

Agricultural  paper ;  how  determined  308 

Discount  by  maker  or  indorser   308 

Paper  payable  to  seller  of  commodity   308 

Paper  payable  to  a  bank  308 

Agricultural   paper ;    how   identified    309 

Amount  of  paper  rediscountable  by  Federal  Reserve  Banks  309 

General  statutory  provisions    309 

Amount  of  paper  rediscountable  left  with  discretion  of  Federal  Re- 
serve  Board    309 

Opinions  of  counsel  and  rulings  relating  to  amount  of  agricultural  paper 

rediscountable    309 

Limit  of  agricultural  paper  rediscountable  by  Federal  Reserve  Bank..  309 

Rediscount  of  commodity  paper   310 

Regulations  of  the  Federal  Reserve  Board  310 

Definition  of  commodity  paper  310 

Opinions  of  counsel  and  rulings  relating  to  the  rediscount  of  commodity 

paper     310 

Definition  of   "staples"    310 

Commodity  paper  includes  paper  of  merchants 310 

Drafts  drawn  in  connection  with  sales  to  the  United  States  Govern- 
ment excluded   31O 

Eligible  commodity  paper    310 

General    statutory   provisions    310 

What  constitutes  eligibility    310 

Regulations  of  the  Federal  Reserve  Board  relating  to  eligible  commodity 
paper    310 


'— ■     • 


Contents  and  Index  27 

Page 
Conditions   governing   eligibility    310 

Opinions  of  counsel  and  rulings  relating  to  eligible  commodity  paper 311 

Direct  discounts  of  mercantile  firms  not  allowed 311 

Drafts  drawn  in  connection  with  sales  to  the  United  States  Govern- 
ment  ineligible    3il 

Suspension  of  special  rate  on  commodity  paper  31 1 

Regulations  of  the  Federal  Reserve  Board    311 

Rate   for  movement  of   crops    311 

Rediscount  of  bank  acceptances    3ii 

Regulations  of  the  Federal  Reserve  Board 311 

Banker's  acceptance   defined    311 

Opinions  of   counsel  and   rulings   relating  to  the   rediscount  of  bank  ac- 
ceptances       312 

Eligible  acceptors ;  how  determined   312 

Conditions    governing    negotiability    3^2 

Conditional  bills,  what  constitutes    312 

Conditional   acceptance    312 

Eligible  bank   acceptances    3^2 

General  statutory  provisions   3^2 

Conditions   governing   eligibility    312 

Regulations   of  the  Federal   Reserve   Board   relating  to   eligible  bank  ac- 
ceptances         313 

Maturity ;  indorsement ;  acceptances  eligible  for  rediscount 313 

Opinions  of  counsel  and  rulings  relating  to  eligible  bank  acceptances 314 

Acceptances  indorsed  by  member  banks  of  another  district 314 

Discount  of  acceptances  not  paid  at  Federal  Reserve  bank  314 

Paper  of  acceptance  corporation   3^4 

Gold  coin  and  gold  bullion  as  "goods"   3^4 

Warehouse  receipts  of  independent  warehouses 314 

Differential  rate  for  member  bank  acceptances 3^5 

Ineligible  bank  acceptances   3^5 

Opinions  of  counsel  and  rulings 3^5 

Chattel  mortgages   ineligible    3^5 

Bills  payable  outside  of  the  United  States 3^5 

Evidence  of  eligibility  of  bank  acceptances   3^5 

•  Regulations  of  the  Federal  Reserve  Board 3^5 

Evidence  to  be  furnished  Federal  Reserve  Bank  315 

Opinions  of  counsel  and  rulings  relating  to  evidence  of  eligibility  of  bank 

acceptances    3^5 

Requirement  of  evidence    3^5 

Maturity  relating  to  bank  acceptances    3^6 

General  statutory  provisions   3^6 

Period  of  maturity   3^6 

Regulations  of  the  Federal  Reserve  Board  relating  to  maturity 316 

Requirement  as  to  maturity  of  bankers'  acceptances  discountable 316 

Opinions  of  counsel  and  rulings  relating  to  majority  of  bank  acceptances...   316 
Renewals    3^6 


28  Contents  and  Index 

Pagb 

Indorsement    3i§ 

General  statutory  provisions   316 

Acceptances  indorsed  by  member  banks  discountable  316 

Blank  indorsement    317 

Readily  marketable  staples  317 

Acceptance  of  drafts  drawn  abroad  and  secured  by  foreign  warehouse 

receipts     317 

Acceptance  of  drafts  secured  by  warehouse  receipts 317 

Qualified  acceptance  of  sight  draft  318 

Trade  acceptance  to  financing  of  structural  work  and  other  building 
operations  in  general    318 

SECTION  VI 

Investments 

Acceptances  as  an  Investment   319 

Safety     319 

Maturity    319 

Convertibility  into  cash  320 

Acceptance  of  drafts  by  State  bank  members  321 

Eligibility  for  resdiscount  of  member  bank  acceptance 321 

PART  IV 

FORMS,  AGREEMENTS,  RECORDS,  ETC. 

Form  No.     i.     Form  of   Trade  Acceptance   for  General  Use,   Based  on   Do- 
mestic Sales  of  Merchandise  327 

"      No.     2.     Form  of  Trade  Acceptance  Based  on  Domestic  Sales  of  Mer- 
chandise, with  words  "Maturity  being  in  conformity  with 

original  terms  of  purchase,"  inserted   328 

"      No.     3a.  (Front)    Form    of    Trade    Acceptance    with    Record    Slip    for 

Seller  and  Explanation  Slip  for  Buyer  329 

"      No.     3b.   (Reverse)    Form  of  Trade  Acceptance  with   Record   Slip   for 

Buyer    330 

"      No.    4.     Form  of  Trade  Acceptance  Adapted  for  General  Use 331 

"      No.     5.     Form  of  Trade  Acceptance  Adapted  for  General  Use 331 

"      No.    6.     Form  of  Trade  Acceptance  Adapted  for  General  Use 332 

"      No.     7.     Form  of  Trade  Acceptance  Adapted  for  General  Use 332 

"      No.    8.     Method  of  Propaganda  Used  by  Commercial  Houses  to  En- 
courage the  Use  of  Trade  Acceptances  333 

"      No.    9.     Method   Employed  by   Commercial   Houses   to   Point  Out  the 

Advantages  in  the  Use  of  Trade  Acceptances  334 

"      No.  10.     Acceptances  in  Foreign  Countries  (Canadian  Practice) 335 

"      No.  II.     Ordinary  Banker's  Acceptance;  Specimen  Bill  Drawn  Locally..  336 


"      No. 

19- 

"      No. 

20. 

"      No. 

21. 

"      No. 

22. 

"      No. 

23- 

"      }io. 

24. 

Contents  and  Index  29 

Pace 

No.  12.  Bank  Acceptance  Arising  Out  of  a  Foreign  Transaction ;  Spec- 
imen of  Bill  Drawn  in  a  Foreign  Country 337 

No.  13.    Forms  of  Certificates  Used  to  Indicate  Eligibility  of  Bankers' 

Acceptances  for  Rediscount  with  Federal  Reserve  Banks..  338 
No.  14.     Specimen  of  Bank  Acceptance  Arising  Out  of  a  Transaction 

Involving  the  Exportation  or  Importation  of  Goods 339 

No.  15.    Bank  Acceptance  Arising  Out  of  a  Transaction  Involving  the 

Domestic   Shipment  of   Goods 340 

No.  16.    Form  of  Bank  Acceptance  Based  upon  a  Transaction  Involving 

Warehouse  Receipts   341 

No.  17.    Commercial  Domestic  Acceptance  Agreement 342 

No.  18.  Commercial  Acceptance  Agreement  Used  in  connection  with 
Acceptance  Credits  granted  by  a  Bank  for  the  Purpose  of 
Financing  Imports  or  Exports  or  Merchandise  Stored  in 

Warehouses  in  the  United  States  or  Abroad  344 

Trust  Receipt  Used  in  Connection  with  Acceptance  Credits 348 

Trust  Receipt  Used  in  Connection  with  Acceptance  Credits...  350 

Trust  Receipt  (Documents  for  Warehousing) 352 

Trust  Receipt   (For  Withdrawal  of  Collaterals)    354 

Bailee  Receipt    356 

Form  of  Acceptance  Register  Book  358 

PART  V 

LAWS 

The  Negotiable  Instruments  Law — The  Purpose  of  Which  Is  to  Make  Uni- 
form Throughout  the  United  States  the  Law  Relating  to  Negotiable 

Commercial  Paper 

Taxation  of  Negotiable  Instruments,  Checks,  Time  Drafts,  Acceptances  and 

Promissory  Notes 

Analysis  of  Negotiable  Instruments  Taxable 426 

Classes  of  Negotiable  Instruments  Taxable   425 

Government  and  Municipal  Obligations  Exempted  428 

Penalties    428 

Penalty  for  failure  to  comply   428 

Cancellation     429 

Use  of  cancelled  stamps — refunds    430 

Liability  to  tax   430 

Promissory   Notes   Included;   When   and  Where   Taxable 427 

Promissory  Notes ;  When  and  Where  Exempt  from  Taxation 428 

Text  of  Law  Relating  to  Taxation  of  Negotiable  Instruments 426 

When  and  Where  Negotiable  Instruments  Exempt  from  Taxation 427 


30  y/  Contents  and. Index 

FOREIGN  FINANCING  UNDER  THE  EDGE  ACT 

American    ownership    442 

Directors ;  officers  ;  etc 442 

Capital   Stock  and  Dividends 442 

$2,000,000  minimum  investments  by  banks 442 

Purchase  of  stock  442 

Conversion    446 

Conversion  of  State  Institutions ;  State  law  446 

Corporate   Functions    438 

Organization  formalities ;  directors  must  be  citizens 438 

Directors     443 

Reserve  Board  members   443 

Dissolution     443 

Embezzlement — Penalties     447 

False  entries ;  penalties  for  abuses 447 

False  Representation    447 

Finances    444 

Annual  meetings,  reports  and  examinations 444 

Dividends    445 

Forfeiture  of  Franchise  444 

Violation  of  law  444 

Voluntary   liquidation 444 

General  Powers   439 

Foreign  exchange  operations    439 

Debentures  to  ten  times  capital  stock  and  surplus 439 

Limitations  on  deposits   439 

Reserve  Board  oversight    439 

Establishment  of  agencies  and  branches  439 

Insolvency  and  Receivership   444 

Liability  of   Stockholders,  Officers  and  Directors 443 

Limitations  on  Scope  of  Activities    441 

Business  in  United  States 441 

Organization  of  Corporations   437 

Articles  of  Association   437 

Required  to  be  forwarded  to  Federal  Reserve  Board 438 

What  is  required  to  be  stated  438 

Power  to  Purchase  and  Hold  Stock 440 

Stock  of  other  corporations ;  limit  to  holding 440 

Purchase  to  prevent  loss    441 

Price  Fixing   441 

Renewal    445 

Twenty   year    period    445 

Synopsis  and  Explanation   433 

Taxation    445 

State   taxation    445 


DIGEST  OF  THE  FEDERAL  BILL  OF  LADING  ACT 

With  a  Preface  as  to  its  Importance  to  Commerce  and  Finance 


THE  UNITED  STATES  WAREHOUSE  ACT 
Its  Importance  to  the  Acceptance  and  Commercial  Banking 


PART  I 

MONEY,  BANKING  AND  CREDITS , 

1.  Money,  Banking  and  Credits. 

2.  Banking  in  the  United  States  before  the  Adoption  of  the 

Federal  Reserve  System. 

3.  Banking  in  the  United  States  under  the   Federal   Reserve 

System ;  its  Principles  and  Operation. 

4.  Banking  and  Credits  in  Europe,  England,  France  and  Ger- 

many. 


CHAPTER  I 
Money,  Banking  and  Credits 

Commerce  in  the  primitive  ages  was  carried  on  by  the  exchange 
of  goods  or  commodities,  otherwise  known  as  barter,  and  without  the 
use  of  money  or  credit.  Since  the  time  men  first  came  into  active 
contact  with  each  other,  they  endeavored  to  obtain  their  needs  by 
whatever  means  appeared  to  them  best,  and  as  they  were  always  in 
need  of  some  particular  article,  class  of  goods  or  merchandise,  which 
another  possessed,  it  became  a  practice  for  them  to  give  up  an  article 
which  was  less  desirable  in  exchange  for  one  which  they  could  use  to 
better  advantage. 

But  as  men  and  arts  increased,  a  mere  barter  of  commodities  became 
inconvenient  and  insufficient  in  abundance  of  instances.  A  better 
medium  of  exchange  or  some  standard  of  computation — of  value — 
capable  of  being  handled  much  more  conveniently  than  the  bulky 
wagonload  of  wheat  or  drove  of  oxen,  became  necessary. 

In  still  an  early  period  in  the  economic  history  of  man,  there  was 
established  some  medium  of  exchange  in  the  form  of  goods.  Skins 
of  animals  at  one  time  constituted  a  medium  of  exchange.  Wheat, 
corn  and  other  cereals  by  the  bushel  or  specific  load  constituted  also 
an  exchange  value.  Tobacco,  wool  and  other  staple  commodities  also 
formed  a  medium  of  exchange.  A  better  substitute  was  found  in  the 
baser  metals,  such  as  iron,  bronze,  copper,  etc.,  which  being  put  into 
certain  shapes  and  forms,  also  served  as  mediums  of  exchange.  The 
Romans  and  the  Grecians  had  coins  of  bronze,  and  later  of  gold.  Other 
races  had  iron  money.  The  Indians,  at  the  time  of  the  discovery  of 
America  were  found  to  use  wampum  shells  as  money. 

With  the  progress  of  man,  the  general  utility  of  precious  metals 
as  a  form  of  money  was  recognized,  and  the  employment  of  silver  and 
gold  as  common  measures  of  value  was  found  to  be  much  more  prac- 
tical than  the  preceding  systems  of  exchange.  By  these  improved 
means,  one  might  then,  instead  of  waiting  for  his  crops  to  mature,  or 

35 


36  Bank  and  Trade  Acceptances 

for  his  sheep  or  horse  to  become  full  grown,  employ  this  gold  or  silver 
as  a  means  of  acquiring  what  was  most  desired. 

But,  in  time,  people  came  to  feel  the  inconvenience  of  carrying  with 
them  a  supply  of  coin  and  bullion,  and  became  satisfied,  in  commer- 
cial transactions,  to  accept  a  promise  on  the  part  of  the  purchaser  to 
pay  the  amount  due  at  a  certain  date.  This  was  the  foundation  of  our 
modern  credit  system.  The  people,  thereafter,  feeling  the  unsafety 
attendant  upon  their  keeping  such  coin  and  bullion,  in  the  form  of 
gold,  silver  and  other  precious  metals  always  in  their  possession,  or 
hoarded  away  and  unproductive  in  their  homes,  entrusted  these  funds 
to  a  class  of  goldsmiths  and  custodians  of  valuables,  who  were  in  a 
much  better  position  to  care  for  them.  A  fee  in  the  form  of  a  com- 
mission was  generally  paid  in  consideration  of  the  custodian's  services. 

Later,  the  goldsmiths  and  custodians  of  valuables,  principally  the 
Florentine  in  Italy,  and  the  Lombardi  in  England,  were  quick  to 
realize  the  opportunity  existing  in  lending  out  the  money  deposited 
with  them  to  others  for  a  consideration  in  the  form  of  "interest" 
which  the  borrowers  paid  them  for  the  use  of  this  money.  The  devel- 
opment of  this  system  of  lending  was  coincident  with  the  rise  of 
modern  banking. 

The  next  step  was  the  development  of  a  credit  system,  whereby 
present  values  were  given  in  exchange  for  promises  of  future  perform- 
ance. Thus,  A  sells  to  B  a  certain  quantity  of  merchandise,  and  in- 
stead of  acquiring  cash  in  the  sale,  which  would  take  it  without  the 
bounds  of  a  credit  transaction,  he  takes  as  a  substitution  for  imme- 
diate payment  a  promise  on  the  part  of  B  to  pay  the  value  thereof  at 
a  future  time. 

Credt;  Definition  of  Credit 

Credit  may  be  broadly  defined  as  the  power  to  get  goods  in  ex- 
change for  a  promise  or  contract  to  deliver  an  equivalent  at  some  future 
time.  In  other  words,  it  is  a  promise  to  pay  money  in  the  future  in  ex- 
change for  some  consideration  received  in  the  present.  Thus,  a  man  is 
said  to  have  good  credit  if  he  has  the  reputation  among  his  business  friends 
of  paying  his  debts  promptly  when  due.  A  firm  is  said  to  obtain  a  line 
of  credit  with  another  business  house  or  from  a  bank,  if  its  financial  and 
moral  standing  is  such  as  would  support  the  "credit,"  with  assurances 
that  it  will  be  met  at  the  proper  time. 


Commercial  Banking  and  Credits  37 

Confidence  and  Futurity  Both  Elements  of  Credit 

Credit  is  based  upon  confidence.  Credit  is  also  based  upon  futurity  of 
payment.  There  is  some  difference  of  opinion  as  to  whether  confidence 
or  futurity  is  the  essential  thing  in  credit  and  as  to  whether  credit  is  based 
upon  money  or  upon  goods.  Futurity  may  be  said  to  be  the  distinctive 
factor  in  credit,  while  confidence  lies  at  the  basis  of  the  granting  of  credit. 
The  time  element  in  credit  is  likewise  very  important.  In  every  type  of 
credit  transaction,  as  call  loans  and  mortgage  loans,  confidence  rests  more 
on  the  security  or  property  pledged  than  upon  the  borrower's  personal 
integrity,  though  confidence  is  present  in  some  form  or  other  in  all  transac- 
tions involving  the  granting  of  credit.  Credit  is  usually  expressed  in  terms 
of  money,  though  it  is  extended  by  means  of  goods,  and  is  completed  by 
the  payment  of  money. 

Functions  of  Credit 

The  most  important  service  of  credit  is  to  facilitate  the  transfer  of 
capital  and  thus  to  promote  the  production  of  wealth.  Credit  is  not  in 
itself  either  capital  or  wealth.  It  is  a  means  to  both.  Wealth  consists  of 
economic  things  and  capital  consists  of  economic  goods  used  in  the  pro- 
duction of  wealth. 

Credit  has  been  characterized  as  the  wheels  of  commerce.  It  is  more 
than  this.  It  is  the  foundation  of  business.  It  is,  as  Daniel  Webster 
said,  "the  vital  air  of  the  system  of  modern  commerce.  It  has  done 
more — a  thousand  times  more — to  enrich  nations  than  all  the  mines  of 
all  the  world.  It  has  excited  labor,  stimulated  manufactures,  pushed 
commerce  over  every  sea,  and  brought  every  nation,  every  kingdom 
and  every  small  tribe  among  the  races  of  men  to  be  known  to  all  the 
rest.  It  has  raised  armies,  equipped  navies  and  triumphed  over  the 
gross  power  of  mere  numbers.  It  has  established  national  superiority 
on  the  foundation  of  intelligence,  wealth  and  well  directed  industry. 

"Credit  is  to  money  what  money  is  to  articles  of  merchandise.  As 
hard  money  represents  property,  so  credit  represents  hard  money,  and 
is  capable  of  supplying  the  place  of  money  so  completely  that  there 
are  writers  of  distinction  who  insist  that  no  hard  money  is  necessary 
for  the  interests  of  commerce. 

"I  am  not  of  that  opinion.  I  do  not  think  that  any  Government 
can  maintain  an  exclusive  paper  system  without  running  to  excess, 


146 


38  Bank  AND  Trade  Acceptances 

and  thereby  causing  a  depreciation.  I  hold  the  immediate  converti- 
bility of  bank  notes  into  specie  to  be  an  indispensable  security  for 
their  retaining  their  value,  but  consistently  with  this  security  and 
indeed  founded  upon  it,  credit  becomes  the  great  agent  of  exchange. 
It  increases  consumption  by  anticipating  products  and  supplies  pres- 
ent wants  out  of  future  needs.  As  it  circulates  commodities  without 
the  actual  use  of  gold  and  silver,  it  not  only  saves  much  by  doing  away 
with  the  constant  transportation  of  precious  metals  from  place  to 
place,  but  also  accomplishes  exchanges  with  a  degree  of  dispatch  and 
punctuality  not  otherwise  to  be  obtained.  All  bills  of  exchange,  all 
notes  running  upon  time,  as  well  as  the  paper  circulation  of  the  banks 
follow  to  the  system  of  commercial  credit.  They  are  parts  to  one  great 
whole.  We  should  protect  this  system  with  increasing  watchfulness, 
taking  care  on  the  one  hand  to  give  it  full  and  fair  play,  and  on  the 
other  to  guard  it  against  dangerous  excess." 

It  has  been  estimated  by  authorities  that  ninety  per  cent,  of  the 
nation's  business  is  conducted  on  credit.  To  estimate  its  importance 
to  the  commercial  world,  let  us  assume  that  no  such  thing  as  credit 
exists.  We  should  then  be  compelled  to  use  some  other  medium  of 
exchange  to  transact  the  same  volume  of  business  as  is  carried  on  at 
present.  Every  purchase  would  require  an  immediate  payment  in 
the  next  best  substitute,  which  for  the  moment,  let  us  say  is  gold. 
This  would  require  in  the  conduct  of  modern  business  many  times 
more  of  the  precious  metal  than  the  available  supply.  The  value  of 
credit  can  therefore  be  readily  estimated. 

The  V'arious  Kinds  of  Credit 

The  divisions  of  credit  have  been  classified  as  follows :  Public 
credit;  capital  credit;  mercantile  credit;  individual  or  personal  credit; 
and  banking  credit ;  which  last  named  includes  commercial  credit. 

By  "public  credit"  is  meant  chiefly  the  borrowing  operations  of 
governments,  whether  national,  state  or  local,  through  the  issue  of 
interest  bearing  obligations  or  securities.  By  the  issuance  of  such 
securities,  the  government  receives  a  form  of  credit  called  "public 
credit,"  because  it  is  used  for  public  purposes.  The  consideration 
upon  which  it  receives  this  credit  is  by  its  giving  to  lenders  a  promise 
of  future  performance,  that  is,  of  future  payment  of  its  obligations  in 
the  form  of  bonds  or  certificates  evidencing  indebtedness. 


Commercial  Banking  and  Credits  39 

By  "capital  credit,"  or  "industrial  credit,"  is  meant  the  credit  used 
by  corporations  in  procuring  the  necessary  capital  requirements  for 
their  business  operations.  The  bondholders  extend  funds  to  the  cor- 
poration in  exchang-e  for  the  corporation's  promise  to  pay  them  at  a 
future  date  the  equivalent  value  of  the  bonds,  with  interest. 

Capital  investments,  as  for  instance,  by  a  proprietor  of  a  business, 
or  by  a  co-partnership  are  not  "capital  credit,"  because  they  work  for 
themselves  alone,  and  the  profits  of  the  business,  whatever  they  may 
be,  go  to  the  owners  alone.  This  is  really  no  form  of  credit.  It  is 
rather  a  "capital  investment." 

"Mercantile  credit"  is  used  by  producers,  wholesalers,  retailers, 
commission  merchants,  etc.,  in  connection  with  the  manufacture  and 
sale  of  goods  from  producer  to  ultimate  consumer.  A  manufacturer 
would  buy  a  quantity  of  raw  materials  to  be  made  into  finished  prod- 
ucts. To  obtain  this  raw  material,  he  would  agree  to  pay  the  pro- 
ducer of  the  raw  material  only  after  he  has  sold  the  product.  In  this 
way  there  arises  a  form  of  credit  known  as  "mercantile  credit,"  or  a 
time  obligation,  that  is,  a  promise  of  future  payment.  An  indirect 
means  of  mercantile  credit  would  be  a  loan  from  the  bank  by  the 
manufacturer  whereby  the  credit  is  extended  by  the  bank  instead  of 
by  the  producer. 

The  term  "personal"  or  "individual  credit"  designates  that  form  of 
credit  availed  of  by  individuals,  rather  than  by  public  or  private  cor- 
porations. It  is  the  means  by  which  an  individual  may  secure  goods 
for  consumption  purposes,  without  an  immediate  payment  of  cash. 
This  form  of  credit  appears  in  the  time  payment  plans  of  the  laborer 
and  the  salaried  man,  who  might  pay  weekly  or  monthly  his  grocery 
bill,  meat  bill,  gas  or  electric  light  bill.  Equivalent  terms  under  this 
heading  are  "consumption  credit"  and  "retail  credit,"  because  pri- 
marily used  in  retail  transactions.  Personal  credit  generally  does  not 
require  a  security  of  any  kind  other  than  an  implied  promise  or  written 
promise  to  pay  in  the  future. 

The  most  important  form  of  credit  is  "banking"  or  "commercial 
credit."  Banks  in  this  connection  furnish  funds  to  borrowers  of  every 
description,  and  it  is  to  the  banks  that  one  in  need  of  credit  naturally 
turns.  "Bank"  or  "commercial  credit"  is  extended  by  means  of  the 
bank's  own  capital,  and  also  in  part  from  the  funds  which  have  been 
left  with  the  bank  by  depositors  in  general,  and  what  is  most  im- 


40  Bank  and  Trade  Acceptances 

portant  of  all,  through  the  use  of  the  bank's  own  credit.  A  bank  uses 
its  own  credit  in  much  the  same  way  as  does  an  individual. 

The  elements  of  credit  are  a  reputation  for  business  honesty  and 
ability,  some  kind  of  security,  in  the  form  of  accommodations  that  enter 
into  trade,  or  paper  having  a  value,  or  tangible  property.  Borrowers 
under  this  form  of  credit  use  their  good  name  and  property  as  a  means 
of  securing  funds  for  immediate  use.  A  bank,  likewise  if  it  possesses 
the  confidence  of  the  community,  is  able  to  extend  its  business  by 
means  of  its  credit.  This  is  evidenced  by  the  fact  that  the  community 
entrusts  its  funds  to  the  bank  for  safekeeping  or  general  use,  as  the 
case  may  be. 

But  a  more  important  way  in  which  commercial  banks  use  their 
credit  is  illustrated  by  the  following:  A  bank  knows  from  experience 
that  to  every  cash  dollar  required  in  the  operation  of  its  business,  ten 
times  that  amount  in  the  form  of  credit,  or  transactions  not  requiring  the 
use  of  actual  money,  are  necessary.  If,  therefore,  a  bank  has  one  mil- 
lion dollars  in  cash  on  hand,  it  is  able,  by  means  of  its  credit,  to  do 
a  business  equal  to  many  times  the  amount  of  cash  it  has.  This  is 
accomplished  through  borrowing  on  its  credit. 

Banking 

In  our  system  of  banking,  there  are  at  least  three  types  of  institu- 
tions distinguishable,  the  savings  bank,  the  investment  bank  and  the 
commercial  bank. 

The  organization  of  savings  banks  is  along  entirely  different  lines 
from  either  the  investment  banks  or  the  commercial  banks,  and  is 
easily  distinguishable  from  them.  They  usually  encourage  savings 
on  the  part  of  the  people,  endeavor  to  collect  such  savings  otherwise 
hoarded  by  the  populace,  and,  after  acquiring  them  in  sufficiently 
large  numbers  and  amounts,  use  them  in  loans  on  such  security  as 
real  estate,  and  by  investments  in  Government  bonds,  high  grade 
railroad  bonds,  and  such  other  securities  as  are  designated  legal  in- 
vestments for  trust  funds  by  the  State  wherein  the  savings  bank  is 
located.  In  this  way  they  release  such  funds  for  productive  purposes. 
Legislative  enactments  make  the  operations  of  savings  banks  of  a  most 
conservative  nature,  and  every  effort  is  made,  on  the  part  of  the  public, 
through  its  legislature,  to  protect  the  depositors  as  well  as  to  maintain  a 
system  of  savings  of  a  quasi-public  nature.  The  funds  of  savings  banks 


Commercial  Banking  and  Credits  41 

are  usually  tied  up  for  a  long  period  of  time,  and  the  security  on  which 
loans  are  made  by  them  is  often  of  a  character  that  cannot  be  market- 
able to  the  full  advantage,  except  at  an  opportune  time 

The  Investment  Banker 

The  investment  banker  may  be  considered  as  a  middleman  pure  and 
simple.  To  him  are  presented  propositions  of  various  natures  pertain- 
ing to  the  financing  of  industries,  commercial  enterprises,  railroads, 
etc.  The  investment  bankers  exercising  the  most  influence  are  gen- 
erally those  which  have  acquired,  through  a  long  period  of  business 
operations  a  clientele,  through  which  distribution  of  securities  repre- 
senting new  enterprises  is  made  possible.  Apparently,  it  may  be  seen 
that  the  investment  banker  is  limited  in  his  operations.  With  the 
exception  of  the  very  large  ones,  of  which  there  are  few  in  number,  the 
services  of  the  investment  banker  are  to-day  not  so  widely  available 
as  in  the  past.  This  is  due  mainly  to  the  fact  that  through  successive 
legislation,  the  State  and  National  banks  have  acquired  powers  per- 
mitting them  to  engage  in  operations  similar  to  those  by  which  the 
investment  banker  is  characterized.  However,  in  new  enterprises, 
having  a  speculative  character,  or  basis,  upon  an  undeveloped  field, 
the  aid  of  the  investment  banker  is  most  sought  for  and  utilized.  His 
functions  may  be  said  mainly  to  consist  of  mobilizing  the  investment 
funds  of  the  nation  and  to  assist  in  the  apportionment  of  those  funds 
to  productive  uses. 

Commercial  Banks 

Of  the  thirty  thousand  or  more  banks  in  the  United  States,  twenty- 
eight  thousand  or  so  are  known  as  commercial  banks,  and  it  may  be 
said  that  it  is  upon  the  success  or  failure  of  their  operations  that  the 
prosperity  of  the  nation  is  closely  bound  up.  Commercial  banks  may 
be  considered  as  credit  institutions  and  as  the  country's  credit  man- 
agers. Their  purpose  consists  in  mobilizing  the  country's  reserves, 
and  so  using  them  as  to  make  them  most  productive  and  of  most 
benefit  to  the  country.  Unlike  the  operations  of  savings  banks,  with 
their  secured  character  and  unfluctuating  conditions  coincident  with  a 
savings  and  conservative  population,  the  commercial  banks  cannot  and 
neither  are  they  at  law  permitted  to  tie  up  their  funds  in  long  time 


42  Bank  and  Trade  Acceptances 

investments.  The  nature  of  their  business  and  the  very  basis  of  their 
existence  is  in  rendering  the  maximum  of  service  to  the  business  com- 
munity. A  depositor  may  have  entrusted  only  yesterday  to  a  bank 
the  keeping  of  a  sum  of  one  hundred  thousand  dollars,  not  knowing 
at  v^'hich  time  he  will  find  it  necessary  to  use  the  funds.  A  day  or  so 
later  there  may  present  itself  an  opportunity  for  him  to  take  advantage 
of,  and  he  may  thus  be  required  to  use  such  funds  to  materialize  his 
Durpose.  This  may  necessitate  the  withdrawal  of  a  large  part  of  his 
deposit  amount,  which  may  be  the  case  with  a  thousand  and  one 
depositors  of  the  same  bank.  It  is,  therefore,  apparent  that  even  in 
its  regular  course  of  business,  the  operations  of  the  commercial  bank 
are  far  different  from  the  investment  bank.  It  must  be  enabled  at  any 
time  to  convert  its  assets,  in  whatever  form,  into  ready  funds. 
Liquidity  of  assets  is  as  important  in  a  commercial  bank's  operations 
as  security  of  assets. 

The  Functions  of  Commercial  Credit 

The  business  of  commercial  banks  is  said  to  be  to  "lend"  or  "dis- 
count" and  to  hold  deposits.  A  third  function  may  be  combined  with 
the  above  two,  that  is,  the  issuance  of  bank  notes  or  the  bank's  own 
promises  to  pay,  for  use  in  general  circulation,  as  a  substitute  for 
money. 

Borrowers  procure  loans  from  banks  for  the  purpose  of  providing 
themselves  with  the  means  either  of  making  some  purchase  or  of 
paying  some  debts.  They  seek,  therefore,  to  obtain  not  necessarily 
money,  but  a  certain  amount  of  purchasing  power  in  available  form 
or  whatever  may  be  the  usual  mediums  of  payment — measured  in 
terms  of  money. 

If  we  suppose  the  prospective  borrower  to  be  a  merchant,  buying 
and  selling  goods  on  credit,  in  the  regular  course  of  his  business,  he 
is  likely  at  any  given  time  to  have  in  his  hands  a  greater  or  lesser 
number  of  notes  not  yet  due  signed  by  the  persons  to  whom  he  has 
previously  made  sales.  It  is  in  the  form  of  a  loan,  made  upon  the 
security  of  one  or  more  of  these  notes  giving  him  immediate  com- 
mand of  the  amount  which  will  become  due  upon  them  in  the  future, 
that  he  is  likely  to  procure  what  he  needs  from  the  bank.  This  loan 
may  take  the  form  of  what  is  termed  a  discount,  in  which  case,  in 
exchange  for  the  note  "discounted,"  the  borrower  is  entitled  to  receive 


Commercial  Banking  and  Credits  43 

from  the  bank  the  amount  promised  in  the  note,  less  the  interest  on 
that  amount,  computed  at  an  agreed  rate,  for  the  term  which  the  note 
has  still  to  run.  The  discounted  note  becomes  the  property  of  the 
bank,  to  which  the  promisor  is  henceforward  bound  to  make  payment 
at  maturity,  and  this  payment,  when  made,  obviously  restores  to  the 
bank  the  amount  advanced  by  it  in  exchange  for  the  note,  together 
with  interest,  which  was  the  inducement  for  making  the  exchange. 

The  above  operation  is  generally  spoken  of  as  a  loan  by  the  bank 
to  a  borrower.  But,  however,  it  is  more  than  a  mere  loan.  When 
the  note  was  given  to  the  bank,  it  bore  evidence  that  its  holder  owned 
the  right  to  receive  at  a  fixed  date,  a  certain  sum  of  money,  and  this 
right  the  so-called  borrower  has  ceded  to  the  bank.  We  might  con- 
sider this  as  a  sale  to  the  bank  of  a  right  to  receive  money  in  the 
future,  in  the  same  manner  as  a  sale  of  a  bale  of  silk.  Immediately 
upon  its  transfer  to  the  bank  for  a  consideration,  the  note  takes  its 
place  among  the  investments  or  securities  of  the  bank,  though  it  still 
retains  its  classification  as  a  loan  or  discount. 

We  may  now  consider  what  it  is  that  the  bank  gives  in  exchange 
for  the  right  to  demand  and  receive  money  at  a  future  time,  acquired 
by  it  under  these  circumstances.  The  proceeds  of  the  discounted  note 
or  its  nominal  amount,  less  the  interest  for  the  time  for  which  it  is  to 
run,  are,  in  the  first  instance  placed  to  the  credit  of  the  merchant,  to 
be  drawn  out  by  him  at  once,  or  at  different  times  as  convenience  or 
necessity  may  dictate.  The  bank,  in  giving  credit  for  the  proceeds, 
gives  really  a  right  to  call  upon  it,  at  pleasure,  for  that  sum  of  money. 
This  right  may  not  be  exercised  at  once,  but  may  be  postponed  as 
regards  the  whole  or  a  part  of  the  amount  until  a  much  later  date. 
The  process  is  therefore  an  exchange  of  rights,  that  ceded  by  the 
merchant  to  the  bank  in  exchange  for  the  bank's  right  to  demand  or  to 
draw  against  it  an  equivalent  sum. 

A  deposit,  however,  may  owe  its  origin  to  a  different  operation  from 
that  above  cited.  It  might  be  that  the  merchant,  having  cash  in  hand, 
prefers  not  to  hold  it  in  his  possession  until  required  for  use  by  him 
at  a  future  date,  but  prefers  to  deposit  it  with  the  bank  with  which 
he  usually  transacts  his  business,  until  a  need  for  this  money  arises. 
Here,  too,  with  the  passing  of  the  money  to  the  bank,  the  "depositor" 
receives  in  exchange  the  right  to  demand  and  receive  at  pleasure  not 
that  which  he  paid  in,  but  an  ecjuivalent  amount.  This  is  also  an 
exchange  of  rights,  the  one  given  up  by  the  depositor  being  the  right 


^J4  Bank  and  Trade  Acceptances 

to  immediate  use  of  the  money  by  the  bank,  in  exchange  for  the  bank's 
right  given  to  the  depositor  to  demand  a  sum  of  money  from  it  at  any 
time. 

The  following  is  also  an  illustration  of  an  exchange  of  rights,  as  for 
example,  where  a  bank,  for  the  convenience  of  its  customer  or  depos- 
itor undertakes  to  collect  a  note  due  to  him  by  some  third  party,  in 
which  case  the  amount  paid  to  the  bank,  in  money,  by  the  promisor, 
is  passed  to  the  credit  of  the  promisee  as  a  deposit.  In  this  case,  the 
bank  has  received  money  for  the  account  of  the  depositor,  and  has 
given  to  him  in  exchange  for  this  money  a  right  to  draw  at  pleasure 
for  the  amount  or  any  part  thereof,  the  property  in  the  money  actually 
paid  having  passed  absolutely  to  the  bank  in  exchange  for  the  right  to 
draw. 

The  exchange  of  rights  is  also  illustrated  where  a  bank  buys  a  bill 
of  exchange  from  a  merchant,  or  when  it  sells  its  own  bill  of  exchange 
drawn  on  its  correspondent,  both  being  in  effect  exchanges  of  money 
against  a  right  or  of  a  right  against  money. 

We  next  come  to  a  consideration  of  a  third  form  of  banking  opera- 
tion, which  exists  in  the  issuance  of  bank  notes.  This  is  in  effect  only 
another  form  of  liability,  which  differs  in  appearance,  though  not  in 
substance,  from  the  liability  for  deposits.  A  bank  note  is  defined  as  a 
duly  certified  promise  on  the  part  of  the  bank  to  pay  on  demand,  a  cer- 
tain sum  of  money,  and  is  adapted  for  circulation  as  a  convenient  sub- 
stitute for  the  money  which  it  promises.  It  is  issued  by  the  bank  and  can 
be  issued  only  to  such  persons  as  are  willing  to  receive  the  engagement 
of  the  bank  in  this  form,  instead  of  receiving  money  or  instead  of 
being  credited  with  a  deposit.  Thus,  the  so-called  borrower,  who  in 
the  first  instance  has  been  credited  with  a  deposit  and  to  whom  the 
bank  is  therefore  to  this  extent  liable,  may  prefer  to  draw  the  amount 
in  notes  of  the  bank  and  to  use  them  in  making  his  payments.  In  this 
case  also,  as  well  as  in  the  preceding  ones,  the  bank  does  not  give  up 
actual  money,  for  if  the  depositor  pays  in  money,  and  receives  notes, 
or  receive  notes  in  satisfaction  of  a  demand  of  any  kind  against  the 
bank,  he  foregoes  the  use  of  the  money  itself  and  consents  to  receive 
in  its  stead  a  promise  to  pay  on  demand,  the  evidence  of  which  prom- 
ise is  in  the  form  of  notes. 

In  all  cases  cited,  therefore,  an  exchange  of  rights  is  the  result.  It 
is  an  acceptance  of  a  present  value  by  the  bank  for  an  exchange  of  a 
right  to  demand  money  at  a  future  date.    While  this  does  not  exclude 


Commercial  BANKI^fG  and  Credits  45 

the  possibility  of  an  exchange  of  rights  of  present  values,  still  the 
majority  of  transactions  passing  through  a  bank's  operations  consist 
of  the  exchange  of  such  rights  which  are  in  substance  of  present  value 
to  the  bank  and  of  future  value  to  those  with  which  it  deals,  and  some- 
times vice  versa.  The  first  case  is  best  illustrated  in  depository 
accounts,  while  the  reverse  is  true  in  the  process  of  discounting. 

The  Services  and  Functions  of  a  Bank 

Banks  are  utilized  most  as  places  of  security  for  the  deposit  of 
money.  The  business  of  banking  arose  from  a  desire  on  the  part  of 
merchants  to  obtain  a  place  where  they  might  with  safety  lodge  their 
funds.  It  is  common  knowledge  that  anyone  who  has  had  the  care  of 
large  sums  of  money,  knows  that  it  is  not  without  great  anxiety 
attendant  upon  their  custody.  A  person  in  this  case  must  either  take 
care  of  his  money  himself  or  entrust  it  to  a  servant.  The  better  way 
would  be  to  entrust  it  to  others  whose  honesty  and  ability  are  well 
known,  and  who  are  engaged  especially  in  that  class  of  business.  The 
evils  accompanying  the  keeping  of  one's  money  under  one's  own  roof 
are  many,  which  by  means  of  banking  are  practically  eliminated. 

Banks  invariably  allow  interest  for  sums  of  money  placed  in  their 
hands  as  deposits.  In  this  way,  large  sums  of  money,  which  otherwise 
remain  unproductive  in  the  hands  of  individuals  or  hoarded  away,  are 
collected  into  large  amounts  in  the  hands  of  the  bankers  who  employ 
them  in  granting  facilities  to  trade  and  commerce.  Thus,  banking 
increases  the  productive  capital  of  the  nation. 

Of  great  advantage  are  the  facilities  afforded  by  bankers  to  the 
l»(nefit  of  society,  in  the  making  of  advances  by  the  former  to  persons 
who  want  to  borrow  money.  This  is  effected  either  by  the  discounting 
of  bills  upon  personal  security,  or  upon  the  joint  security  of  the  bor- 
rower, with  sureties  as  an  additional  protection  to  the  bank,  and,  also, 
upon  deeds  and  mortgages  on  real  estate,  or  real  and  personal  prop- 
erty. It  is  thus  that  persons  engaged  in  trade  and  commerce  are 
enabled  to  augment  their  capital,  and  consequently  their  wealth.  Pro- 
duction, moreover,  is  stimulated  by  the  increase  of  money  circulation 
which  otherwise  is  kept  away  from  the  channels  where  it  would  best 
benefit  trading. 

Bankers  transmit  money  from  one  part  of  the  country  to  another, 
and  from  one  country  to  another  country.     The  necessity  for  trans- 


46  Bank  and  Trade  Acceptances 

ferring  money  arises  very  frequently  on  the  part  of  merchants  and 
traders.  This  can  be  most  conveniently  done  by  paying  the  money 
to  a  bank,  which,  in  turn,  arranges  with  a  correspondent  bank  in  or 
near  the  distant  town  to  pay  the  designated  party  the  amount  speci- 
fied. The  risk  of  transferring  actual  money  is  therefore  eliminated, 
and  by  means  of  periodical  settlements  between  the  two  banks,  such 
transfers  are  made  comparatively  inexpensive. 

"Till  money"  is  that  denomination  of  currency  which  is  best  adapted 
for  carrying  on  commercial  operations  in  a  particular  place.  When- 
ever a  bank  is  established,  the  public  is  enabled  to  obtain  that  denom- 
ination of  currency  or  "till  money"  which  they  need  most  in  their 
business.  In  a  town  which  has  no  bank,  a  person  may  have  occasion 
to  use  small  notes  and  have  none  but  large  ones,  and  at  other  times 
he  may  have  need  of  large  notes  and  not  be  able  to  obtain  them.  The 
banks  have  at  all  times  a  supply  of  notes  of  all  denominations  which 
depositors  may  require,  and  are  always  ready  to  exchange  them  for 
others  of  a  different  denomination.  Banks,  too,  have  a  supply  of  silver 
at  all  times,  and  if  it  is  necessary  that  the  community  be  furnished 
with  more  silver,  banks  will  obtain  it.  Contra,  banks  will  receive 
specie  in  the  form  of  a  deposit  or  exchange  for  their  notes  should  it 
be  too  abundant  in  any  locality.  This  is  of  great  convenience  to  the 
community  as  it  eliminates  the  necessity  of  people  keeping  on  hand 
too  large  a  sum  of  money  to  meet  their  needs. 

Of  great  advantage  to  a  bank's  customers  is  that  service  rendered 
by  a  bank  by  means  of  which  one  is  able  to  save  time  and  trouble 
otherwise  necessary  in  the  handling  of  actual  money.  Consider  how 
much  longer  it  will  take  to  count  up  a  large  sum  of  money  than  it 
does  to  write  out  a  check  or  a  draft,  and  how  much  less  trouble  it  is 
to  receive  a  check  or  a  draft  to  pay  the  bank,  than  it  is  to  pay  the  sum 
of  money  in  currency.  The  development  of  the  check  and  the  draft 
with  its  many  available  uses  affords  a  great  advantage  and  convenience 
to  depositors  of  banks  and  the  public  in  general. 

Banks  render  a  very  valuable  service  in  making  collections  for  their 
customers.  A  merchant  or  tradesman  who  keeps  a  banker  saves  the 
trouble  and  expense  of  presenting  promissory  notes  which  he  holds, 
or  drafts  which  he  may  draw  against  a  customer.  He  may  turn  these 
over  to  his  banker  for  safekeeping  and  collection  at  maturity.  He 
thus  saves  trouble  and  inconvenience  on  his  part,  since  the  custody 
of  his  bills,  the  anxiety  about  their  being  stolen,  the  danger  of  for- 


Commercial  Banking  and  Credits  47 

getting  them  until  they  are  overdue,  thus  exonerating  the  indorsers, 
as  well  as  the  trouble  of  sending  such  bills  to  a  distant  town  in  order 
to  demand  payment  is  shifted  to  the  banker  instead  of  remaining  with 
the  holder  of  the  draft.  The  presenter  of  the  draft  has  nothing  more 
to  do  than  to  see  the  amount  entered  to  his  credit  in  his  banker's 
books.  If  a  bill  be  not  paid,  it  is  brought  back  to  him  on  the  day  after 
it  falls  due,  properly  noted.  Bankers  will  bear  evidence  to  the  fact  that 
the  bill  was  duly  presented,  and  will  furnish  a  notary  to  attest  that 
the  bill  did  not  meet  with  honor  upon  presentation,  assigning  at  the 
same  time  a  reason  why  the  draft  was  not  paid. 

Numerous  other  advantages  are  afforded  by  banks  to  the  public 
generally,  which  are  just  as  important  as  the  services  outlined  above. 

Another  advantage  of  keeping  a  banker  is  that  by  this  means  one 
has  a  continual  reference  as  to  one's  respectability.  If  a  mercantile 
house  in  a  distant  part  of  the  country  writes  to  its  agent  to  ascertain 
the  respectability  of  a  firm  in  another  part  of  the  country,  the  first 
inquiry  is:  "What  are  the  banking  references?"  When  this  informa- 
tion is  ascertained,  the  banker  is  applied  to,  through  the  proper  chan- 
nels, and  he  gives  his  testimony  as  to  the  respectability  of  his  custo- 
mer. When  a  trader  gives  his  bill,  it  circulates  through  the  hands  of 
many  individuals  to  whom  he  is  personally  unknown,  but  if  the  bill 
is  made  payable  at  a  banking  house,  it  bears  on  its  face  a  reference 
to  a  party  to  whom  the  acceptor  is  known  and  who  must  have  some 
knowledge  of  his  character  as  a  tradesman.  This  is  of  immense  ad- 
vantage to  a  man  in  business  as  it  increases  his  credit  standing. 

By  means  of  banking,  people  are  able  to  preserve  an  authentic 
record  of  their  actual  expenditures.  Assume  that  a  person  pays  in 
to  his  banker  all  the  money  he  receives  in  the  course  of  a  year  and 
makes  all  his  payments  by  checks.  By  proper  entries  as  to  the  purpose 
for  which  his  check  has  been  drawn,  as  well  as  by  corresponding 
entries  of  all  receipts  deposited,  he  may  readily  ascertain  the  total 
amount  of  his  receipts  and  the  various  items  of  his  expenditures.  A 
bank  account  is  useful  also  in  case  of  dispute  in  payments.  A  check 
or  draft  upon  a  bank  is  the  best  form  of  receipt  for  money  paid.  A 
payment  in  actual  money,  that  is,  in  the  form  of  bills,  specie,  or  other 
currency,  does  not  furnish  evidence  of  a  payment  in  fact,  while  on 
the  other  hand,  settlement  by  check  or  draft  upon  a  bank  furnishes  a 
receipt  at  the  same  time  as  it  effects  a  settlement. 


48  Bank  and  Trade  Acceptances 

By  keeping  a  banker,  people  have  a  ready  channel  of  obtaining 
much  information  that  will  be  useful  to  them  in  their  business.  They 
will  know  the  way  in  which  bankers  keep  their  accounts.  They  will 
learn  many  of  the  laws  and  customs  relating  to  bills  of  exchange  and 
banking.  By  inquiring  of  the  banker,  many  valuable  advices  may  be 
received  from  him.  The  banks  furnish  information  as  to  the  reliability 
of  respectable  parties  with  whom  they  would  recommend  dealings. 
They  are  also  appointed  executors  and  administrators  of  estates,  act 
as  guardians,  engage  in  financing  by  means  of  bond  issues,  and  per- 
form various  other  functions. 

Banking  also  exercises  a  powerful  influence  upon  the  morals  of 
society.  It  tends  to  produce  honesty  and  punctuality  in  pecuniary 
engagements.  Bankers  in  their  own  interest  always  have  a  rigid 
regard  to  the  moral  character  of  the  party  with  whom  they  deal.  They 
inquire  whether  he  be  honest  or  tricky,  industrious  or  idle,  prudent  or 
speculative,  thrifty  or  prodigal,  and  they  will  more  readily  make 
advances  to  a  man  of  moderate  property  and  good  morals  than  to  a 
man  of  much  property  but  inferior  reputation.  Therefore,  it  may  be 
said  that  the  establishment  of  a  bank  in  any  locality  advances  the 
pecuniary  value  of  good  moral  character. 


CHAPTER  II 

The  American  Banking  and  Credit  System  Before  the  Passage  of 

THE  Federal  Reserve  Act 

Kinds  of  Banking  in  the  United  States. — According  to  official  fig- 
ures there  are  in  existence  in  this  country  some  thirty  thousand  banks, 
all  of  which  fall  within  either  one  of  the  following  groups : 

1.  National  banks. 

2.  State  banks,  which  are  either 

(a)  State  banks  conducting  a  general  banking  business; 

(b)  Trust  companies ; 

(c)  Savings  banks; 

(d)  Private  banks ; 

(e)  Investment  banks ; 

(f)  Bill  and  paper  brokers. 

Supervision  and  Regulation. — Federal  control  is  extended  only  to 
the  national  banks,  while  the  State  banks,  trust  companies,  savings 
banks,  private  and  investment  banks,  and  commercial  paper  dealing 
establishments  are  under  the  direct  supervision  of  the  several  State 
governments. 

NATIONAL  BANKS 

Introduction  of  National  Banking  System ;  Purposes. — The  original 
National  Banking  Act  was  framed  in  1863,  its  establishment  having 
been  previously  urged  by  various  governmental  officers,  principally 
Salomon  P.  Chase,  who  believed  its  introduction  would  be  of  assist- 
ance to  the  government  during  the  Civil  War  as  a  means  of  serving 
the  following  purposes: 

First,  it  was  believed  that  the  introduction  of  the  National  Banking 
System  would  materially  assist  the  government  in  marketing  its  war 
bonds.  Second,  that  it  would  establish  a  uniform  currency  system 
for  the  country.  Though  the  former  purpose  was  never  realized  to 
the  extent  of  original   expectations,  the  unification   of  the  currency 

49 


50  Bank  and  Trade  Acceptances 

system  of  the  country  was  of  great  importance  in  later  banking-  devel- 
opments. 

Organization  of  the  National  Banking  System  Before  the  Adoption 
of  the  Federal  Reserve. — The  head  of  the  national  banking  system  was 
the  Comptroller  of  the  Currency.  He  would  pass  upon  organization 
certificates  on  contemplated  banks  or  would  reject  them  as  he  saw 
fit.  In  the  event  of  their  acceptance,  provided  the  law  was  complied 
with,  a  charter  was  issued  to  run  for  twenty  years,  except  in  cases  of 
ultra  vires  acts,  the  commission  of  which  would  voluntarily  dissolve 
the  bank. 

Capital  Requirements;  Shares  and  Dividends. — The  capital  require- 
ments of  such  national  banks  were  fixed  by  law,  according  to  the  pop- 
ulation of  the  respective  communities  wherein  the  bank  was  sought 
to  be  established,  the  low  limit  of  capital  being  twenty-five  thousand 
dollars  for  banks  in  towns  with  a  population  of  not  exceeding  three 
thousand ;  and  two  hundred  thousand  dollars  capital  in  cities  with  a 
population  of  fifty  thousand  or  more.  Fifty  per  cent,  of  the  authorized 
capital  was  required  to  be  paid  in  before  the  bank  was  allowed  to 
commence  business,  and  the  remaining  fifty  per  cent,  was  to  be  paid 
in  by  installments  of  at  least  ten  per  cent,  of  the  authorized  capital 
each  month,  from  the  time  of  its  authorization. 

Shares  were  of  the  par  value  of  one  hundred  dollars,  and  each  share- 
holder was  liable  to  an  extent  equal,  and  additional  to,  the  amount  of 
shares  so  held  by  him.  National  banks  were  further  required  to  create 
a  surplus  fund  of  twenty  per  cent,  of  their  authorized  capital  stock 
before  the  declaration  of  any  dividends. 

Management   of  National  Banks;   Powers   and   Limitations. — The 

affairs  of  the  banks  were  managed  by  a  board  of  directors,  all  of  whom 
were  required  to  be  citizens  of  the  United  States.  The  board  of 
directors  were  duly  authorized,  themselves,  or  through  their  agents  or 
officers,  subject  to  law,  to  carry  on  the  business  of  banking,  by  dis- 
counting and  negotiating  promissory  notes,  drafts,  bills  of  exchange, 
and  other  evidences  of  debt ;  by  receiving  deposits ;  by  buying  and 
selling  exchanges,  coin,  and  bullion;  by  loaning  money  on  personal 
security  and  by  obtaining,  issuing  and  circulating  notes  according  to 
the  provisions  of  the  Act.    In  connection  with  the  last  named  purpose, 


Commercial  Banking  and  Credits  51 

a  national  bank  was  required  to  deposit  one-quarter  of  its  capital  stock 
in  government  bonds,  which  later  served  as  a  basis  for  bank  note 
issues. 

National  banks  were  not  permitted  to  contract  debts  in  excess  of 
their  unimpaired  capital.  The  total  liabilities  of  any  one  firm,  person 
or  other  legal  entity  could  not  exceed  ten  per  cent,  of  the  bank's 
capital. 

Reserve  Requirements. — Every  national  bank  was  required  to  keep, 
as  reserve,  an  amount  equal  to  from  fifteen  to  twenty-five  per  cent,  of 
its  deposit  liabilities,  according  to  whether  it  was  located  in  a  central 
reserve  city,  such  as  New  York,  Chicago,  or  other;  or  in  an  outlying 
district. 

By  petition  to  the  Comptroller  of  the  Currency,  a  city  with  a  popula- 
tion in  excess  of  fifty  thousand  could  be  denominated  a  central  reserve 
city. 

The  reserve  banks,  that  is,  those  holding  the  reserve  deposits  of 
the  smaller  institutions,  would  again  deposit  these  reserves  with  other 
banks  with  which  they  had  business  dealings,  which  latter  might 
again  redeposit  such  funds  with  other  institutions,  usually  larger 
banks. 

Note  Issues. — National  banks  were  permitted  to  issue  notes  secured 
by  bonds  of  the  United  States  Government  deposited  with  the  Comp- 
troller of  the  Currency.  Various  regulations  as  to  the  extent  of  such 
issues  of  banks  notes,  in  proportion  to  the  bank's  capital,  were  from 
time  to  time  introduced,  the  maximum  finally  being  fixed  to  the  full 
amount  of  the  capital  stock  of  the  bank.  Notes  were  redeemable  in 
lawful  money  at  the  United  States  Government  Treasury,  or  Sub- 
treasuries,  or  by  the  bank.  As  security  for  the  redemption  of  national 
bank  notes,  national  banks  were  required  by  law  to  deposit  with  the 
Comptroller  of  the  Currency  an  amount  equal  to  five  per  cent,  of 
their  note  issues.  This  was  done  chiefly  for  the  purpose  of  protecting 
the  Government  in  the  event  of  the  failure  of  the  bank. 

Government  Supervision. — The  law  required  the  submission  of  at 
least  five  reports  annually,  to  the  Comptroller  of  the  Currency.  Na- 
tional bank  examiners  made  periodical  examinations  of  the  afifairs  of 


52  Bank  and  Trade  Acceptances 

every  bank  to  ascertain  its  stability  and  were  empowered  to  make 
special  investigations  if  necessary. 

Business  Conducted  by  National  Banks. — The  principal  business 
conducted  by  these  national  banks  was  that  of  "discounts  and  loans" 
and  making  collections  for  customers.  They  were  purely  commercial 
in  character.  Foreign  exchange  operations  were  carried  on  principally 
by  the  larger  institutions,  through  means  of  foreign  correspondents. 
They  could  not  assist,  generally,  to  any  appreciable  extent,  in  the 
development  of  our  foreign  commerce. 

In  domestic  trade,  on  the  other  hand,  these  national  banks  had,  by 
long  and  careful  application  to  the  business  customs  of  their  com- 
munities, succeeded  in  gaining  the  confidence  of  their  customers  to  a 
large  degree.  They  were  satisfied  with  conditions  as  they  existed  and 
did  not  wish  to  see  a  new  system  of  banking  introduced  which  they 
feared  might  destroy  those  advantages  which  they  had  been  so  long 
in  acquiring. 

THE  ORGANIZATION,  MANAGEMENT  AND  SUPERVISION 

OF  STATE  BANKS,  TRUST  COMPANIES,  AND 

SAVINGS    INSTITUTIONS 

Character  of  Business. — State  banks,  like  national  banking  institu- 
tions, conducted  a  general  commercial  banking  business.  The  trust 
company  dififered  from  the  ordinary  State  bank,  in  that  it  was  granted 
the  privilege  of  exercising  trust  powers,  and  acted  as  administrator, 
executor  and  guardian.  State  banks,  including  trust  companies,  were 
supervised  by  a  designated  State  officer,  usually  the  State  Superin- 
tendent of  Banks. 

Legislation;  State  Banks. — As  may  be  expected,  no  unity  of  organ- 
ization or  of  administration  existed.  As  to  capital  and  surplus,  the 
various  States  had  each  their  own  requirements.  Reserve  require- 
ments were  common  in  State  bank  laws,  ranging  from  fourteen  to 
fifteen  per  cent,  for  time  deposits,  and  from  fifteen  to  twenty  per  cent, 
for  demand  deposits. 

Supervision  of  State  Banks. — The  State  banks  were  required,  more- 
over, to  furnish  reports  of  their  operations  at  least  a  few  times  a  year. 


Commercial  Banking  and  Credits  53 

to  the  proper  State  banking  officers.  Examiners  were  maintained  to 
go  into  the  affairs  of  banks  at  regular  intervals,  and,  in  special  cases, 
if  necessary.  This  procedure  applied  to  State  banks,  trust  companies, 
savings  banks,  and  savings  and  loan  societies. 

Character  of  Foreign  Business  Conducted  by  State  Banks. — Prior  to 
the  introduction  of  the  Federal  Reserve  System,  these  State  institu- 
tions, by  reason  of  the  fact  that  no  such  stringent  legislation  was  im- 
posed upon  their  entering  foreign  fields  or  engaging  more  widely  in 
foreign  financing,  were  much  in  advance  of  the  national  banks. 

Their  domestic  business  was  of  the  order  of  the  national  banks, 
discounts,  loans  and  collections  comprising  the  bulk  of  the  business 
dealings  of  these  institutions.  They,  too,  had  built  up  a  reputation 
within  their  communities  and  were  by  no  means  anxious  to  have  it 
done  away  with,  without  assurances  that  the  new  system  would  bring 
them  greater  benefits. 

PRIVATE  BANKERS 

Next  in  importance  to  State  banks,  trust  companies  and  savings 
banks,  came  the  private  bankers.  They  were  very  numerous,  exer- 
cising some  influence  among  the  alien  population  of  their  own  race. 
Their  operations  were  not  as  far  reaching  as  those  of  the  national  and 
commercial  State  banks,  but  on  a  much  smaller  scale.  They  dealt 
generally  in  retail  exchange  and  engaged  in  the  sale  of  steamship 
tickets,  acting  as  special  agent  for  the  transportation  of  goods  be- 
tween countries.  However,  in  recent  years,  due  to  stringent  legisla- 
tion being  placed  upon  their  operations,  the  private  bankers  have  felt 
the  hardship  of  standing  up  against  modern  day  systematically  and 
progressively  managed  organizations,  and  their  influence  has  passed 
away  to  a  large  degree. 

THE  INVESTMENT  BANKER 

The  investment  bankers,  however,  showed  strong  organization  and 
progress.  They  exercised  great  influence  in  commercial  banking 
operations.  Their  business  extended  to  the  private  financing  of  indus- 
trials, public  utilities,  commercial  firms,  etc.,  engaging  in  stock  and 
bond  issues,  and  the  distribution  of  same;  dealing  in  foreign  exchange, 


54  Bank  and  Trade  Acceptances 

and  engaging  in  the  sale  and  purchase  of  securities  on  commission, 
for  account  of  their  cHents.  They  acted  as  fiscal  agents  for  municipal- 
ities and  firms,  and  performed  a  relatively  important  service.  Not 
being  under  such  strict  legislative  supervision  as  the  State  banks  and 
national  banks.  They  could  extend  their  operations  into  almost  any 
field,  including  foreign,  on  a  much  wider  scale  than  the  State  or 
national  banks.  In  some  States,  a  reserve  in  the  form  of  securities 
was  required  to  be  deposited  with  the  various  State  governments  for 
protection  of  depositors.  They  were  very  numerous  as  a  class,  and 
very  powerful.  Some  of  the  larger  establishments  extended  their 
operations  even  to  the  control  of  national  and  State  banks  by  means 
of  stock  ownership. 

THE  COMMERCIAL  PAPER  DEALER  AND  BROKER 

The  other  class  of  financial  establishments  directly  supervised  by 
the  State  was  the  commercial  bill  and  paper  broker,  the  services  of 
which,  in  connection  with  commercial  banking  were  of  great  impor- 
tance. They  generally  took  care  of  the  commercial  paper  business  of 
the  larger  firms  and  distributed  it  among  the  banks  throughout  the 
country.  They  rendered  an  important  service  to  the  banks  in  the 
checking  of  such  paper,  and  being  in  a  position  which  familiarized 
them  with  the  firms  with  which  they  came  in  contact,  they  were  able 
to  relieve,  to  some  extent,  the  work  of  the  bank  in  matters  concerning 
credit.  They  also  bought  such  commercial  paper  for  their  own 
account,  and  resold  it  to  the  banks  when  suitable  opportunity  pre- 
sented itself  to  them. 

Resume  of  the  American  Banking  and  Credit  System  as  it  Existed 
Before  the  Introduction  of  the  Federal  Reserve  System 

The  above  briefly  describes  the  banking  organization  of  the  United 
States  as  it  existed  before  the  adoption  of  the  Federal  Reserve  System. 
As  to  its  advantages,  it  could  be  said  that  the  business  was  made  to 
be  paying.  It  was  conducted  with  reasonable  safety.  It  was  adapted 
particularly  to  the  community  in  which  it  was  located,  and  the  system 
of  checks  and  clearings  which  it  developed  was  indeed  in  advance  of 
any  of  those  in  foreign  countries. 


Commercial  Banking  and  Credits  55 

But  there  was  no  uniformity  of  action  or  of  cooperation  among  the 
banks.  They  acted  altogether  in  an  independent  way.  There  was  no 
centralized  head.  The  credit  system  was  far  from  elastic  to  any 
extent  capable  of  keeping  up  with  the  growing  manufacturing  indus- 
tries of  the  country.  The  nation's  reserves  were  entirely  scattered, 
the  principle  of  the  banks  being  more  inclined  to  security  than  to 
liquidity.  There  was  no  system  of  mobility  of  such  reserves.  Neither 
was  there  any  central  head  which  could  collect  the  reserves  of  the 
nation  and  hold  them  in  readiness  to  be  used  to  relieve  financial  strain 
which  at  times  suddenly  forced  itself  upon  the  nation.  Nor  did  the 
then  existing  system  enable  the  banks  to  use  their  reserve  for  most 
productive  purposes. 

Cooperation  among  the  banks  was  lacking.  They  might  have  been 
bound  socially  by  one  or  another  organization,  but  not  further  than 
this.  Individual  banks  were,  in  times  of  stress,  helpless.  There  was 
no  open  discount  market,  nor  standard  form  of  commercial  paper, 
which  by  its  character  might  be  discounted  by  the  banks  in  times  of 
need  and  so  supply  them  with  funds  when  necessary.  There  was  no 
connection  between  the  treasury  system  of  the  country  and  the  banks. 
Government  deposits  were  kept  in  various  institutions  which  qual- 
ified for  this  privilege.  Furthermore,  there  were  no  foreign  branches 
of  American  banks,  a  fact  which  hindered  our  entry  on  a  wider  scale 
into  foreign  markets. 

The  panic  of  1907  was  the  direct  cause  of  much  criticism  of  the 
banking  system  as  it  then  existed.  The  National  Monetary  Commis- 
sion was  finally  appointed  to  study  the  banking  system  of  the  country, 
and  those  of  foreign  nations,  and  to  make  recommendations  for  its 
improvement.  In  its  report  it  brought  out  a  number  of  defects,  the 
most  important  of  which  are  stated  below. 

Scattered  Reserves 

d)  We  have  no  provision  for  the  concentration  of  the  cash  reserves 
of  the  banks  and  for  their  mobilization  and  use  wherever  needed  in 
times  of  trouble.  Experience  has  shown  that  the  scattered  cash 
reserves  of  our  banks  are  inadequate  for  purposes  of  assistance  or 
defense  at  such  times. 


56  Bank  and  Trade  Acceptances 

Effect  of   State  Laws  Upon   Reserves 

(2)  Antiquated  federal  and  state  laws  restrict  the  use  of  bank 
reserves  and  prohibit  the  lending  power  of  banks  at  times  when,  in 
the  presence  of  unusual  demands,  reserves  should  be  freely  used  and 
crdit  liberally  extended  to  all  deserving  customers. 

Immobility  of  Reserves 

(3)  Our  banks  also  lack  adequate  means  available  for  use  at  any 
time  to  replenish  their  reserves  or  increase  their  loaning  powers  when 
necessary  to  meet  normal  or  unusual  demands. 

Bank  Note  Only  Means  of  Credit  Expansion  and  Contraction 

(4)  Of  our  various  forms  of  currency  the  bank  note  issue  is  the  only 
one  which  we  might  expect  to  respond  to  the  changing  needs  of  busi- 
ness by  automatic  expansion  and  contraction,  but  this  issue  is  deprived 
of  all  such  qualities  by  the  fact  that  its  volume  is  largely  dependent 
upon  the  amount  and  price  of  the  United  States  bonds. 

Co-oPERATiON  Among  Banks  Lacking 

(5)  We  lack  means  to  insure  such  effective  cooperations  on  the  part 
of  the  banks  as  is  necessary  to  protect  their  own  and  the  public  inter- 
ests in  times  of  stress  or  crisis.  There  is  no  cooperation  of  any  kind 
among  banks  outside  the  clearing-house  cities.  While  clearing-house 
organizations  of  banks  have  been  able  to  render  valuable  services 
within  a  limited  sphere  for  local  communities,  the  lack  of  means  to 
secure  their  cooperation  or  affiliation  in  broader  fields  makes  it  im- 
possible to  use  these  or  similar  local  agencies  to  prevent  panics  or 
avert  calamitous  disturbances  affecting  the  country  at  large.  The 
organizations  have,  in  fact,  never  been  able  to  prevent  the  suspension 
of  cash  payments  by  financial  institutions  in  their  own  localities  in 
cases  of  emergency. 

No  System  of  Domestic  Exchanges 

(6)  We  have  no  effective  agency  covering  the  entire  country  which 
affords  necessary  facilities  for  making  domestic  exchange  between 
different  localities  and  sections,  or  which  can  prevent  disastrous  dis- 
ruption of  all  such  exchanges  in  times  of  serious  trouble. 


CoMMERaAL  Banking  and  Credits  57 

No  System  of  Foreign  Banking  Operation 

(7)  We  have  no  instrumentality  that  can  deal  effectively  with  the 
broad  questions  which,  from  an  international  standpoint,  affect  the 
credit  status  of  the  United  States  as  one  of  the  great  financial  powers 
of  the  world.  In  times  of  threatened  trouble  or  of  actual  panic  these 
questions,  which  involve  the  course  of  foreign  exchange  and  the  inter- 
national movements  of  gold,  are  even  more  important  to  us  from  a 
national  than  from  an  international  standpoint. 

Commercial  Paper  Not  of  Standardized  Character 

(8)  The  lack  of  commercial  paper  of  an  established  standard,  issued 
for  agricultural,  industrial,  and  commercial  purposes,  available  for 
investments  by  banks,  leads  to  an  unhealthy  congestion  of  loanable 
funds  in  great  centers  and  hinders  the  development  of  the  productive 
forces  of  the  country. 

Limited  Means  for  Employment  of  Funds 

(9)  The  narrow  character  of  our  discount  market,  with  its  limited 
range  of  safe  and  profitable  investments  for  banks,  results  in  sending 
the  surplus  money  of  all  sections,  in  excess  of  reserves  and  local  de- 
mands, to  New  York,  where  it  is  usually  loaned  out  on  call  or  stock- 
exchange  securities,  tending  to  promote  dangerous  speculation  and 
inevitably  leading  to  injurious  disturbances  in  reserves.  The  concen- 
tration of  surplus  money  and  available  funds  in  New  York  imposes 
upon  the  managers  of  the  banks  of  that  city  the  vast  responsibilities 
which  are  inherent  in  the  control  of  a  large  proportion  of  the  banking 
resources  of  the  country. 

Absence  of  a  Broad  Discount  Market 

(10)  The  absence  of  a  broad  discount  market  in  our  system,  taken 
together  with  the  restrictive  treatment  of  reserves,  creates  at  times 
when  serious  financial  disturbances  are  anticipated  a  condition  of 
dependence  on  the  part  of  individual  banks  throughout  the  country, 
and  at  the  same  time  places  the  farmers  and  others  engaged  in  pro- 
ductive industries  at  a  great  disadvantage  in  securing  the  credit  they 
require  for  the  growth,  retention,  and  distribution  of  their  product. 


58  Bank  and  Trade  Acceptances 

Lack  of  Equality  in  Credit  Facilities 

(ii)  There  is  a  marked  lack  of  equality  in  credit  facilities  between 
different  sections  of  the  country,  reflected  in  less  favored  communities, 
in  retarded  development,  and  great  disparity  in  rates  of  discount. 

No  Agency  to  Assist  in  Stability  of  Rates 

(12)  Our  system  lacks  an  agency  whose  influence  can  be  made 
effective  in  securing  greater  uniformity,  steadiness,  and  reasonable- 
ness of  rates  of  discount  in  all  parts  of  the  country. 

System  of  Credit  Expansion  Poor 

(13)  We  have  no  effective  agency  that  can  surely  provide  adequate 
banking  facilities  for  different  regions  promptly  and  on  reasonable 
terms  to  meet  the  ordinary  or  unusual  demands  for  credit  or  currency 
necessary  for  moving  crops  or  for  other  legitimate  purposes. 

Uniform   Publicity  in  Supervision  Absent 

(14)  We  have  no  power  to  enforce  the  adoption  of  uniform  stand- 
ards with  regard  to  capital,  reserves,  examinations,  and  the  character 
and  publicity  of  reports  of  all  banks  in  the  different  sections  of  the 
country. 

No  Foreign  Banking  Facilities 

(15)  We  have  no  American  banking  institutions  in  foreign  coun- 
tries. The  organization  of  such  banks  is  necessary  for  the  develop- 
ment of  our  foreign  trade. 

Defects  in  Loaning  System 

(16)  The  provision  that  national  banks  shall  not  make  loans  upon 
real  estate  restricts  their  power  to  serve  farmers  and  other  borrowers 
in  rural  communities. 


Commercial  Banking  and  Credits  59 

Defects  in  Treasury  System 

(17)  The  provisions  of  law  under  which  the  g-overnment  acts  as 
custodian  of  its  own  funds  results  in  irregular  withdrawals  of  money 
from  circulation  and  bank  reserves  in  periods  of  excessive  government 
revenues,  and  in  the  return  of  these  funds  into  circulation  only  in 
periods  of  deficient  revenues.  Recent  efforts  to  modify  the  Independ- 
ent Treasury  System  by  a  partial  distribution  of  the  public  moneys 
among  national  banks  have  resulted,  it  is  charged,  in  discrimination 
and  favoritism  in  the  treatment  of  different  banks. 

The  National  Monetary  Commission  and  the  Aldrich-Vreeland 

Bill 

As  a  result  of  the  recommendations  of  the  National  Monetary  Com- 
mission, there  was  presented  before  Congress  the  Aldrich-Vreeland 
Bill — Emergency  Currency  Act,  which  had  the  support  of  the  busi- 
ness men  and  bankers  of  the  country,  in  general.  Its  principles  per- 
mitted the  organization  of  group  banks  in  numbers  of  ten,  the  added 
capital,  of  which,  as  a  means  of  association,  would  amount  to  not  less 
than  five  million  dollars,  and  through  which  group  organization  the 
member  banks  could  make  application  for  securing  the  circulation  of 
bank  notes.  One  or  two  other  minor  emergency  changes  were  recom- 
mended, with  a  trend  toward  centralization. 

But  it  was  evident,  however,  that  these  improvements  would  not 
suffice.  There  was  something  more  needed  in  the  banking  system 
of  the  country.  The  nation  was  in  need  of  a  better  credit  system — 
some  standard  of  commercial  paper  having  possibilities  of  supporting 
an  open  discount  market — liquidity  of  reserves — and  a  central  head 
which  could  collect  such  reserves,  and  so  use  them  as  to  be  able  to 
render  assistance  in  times  of  need  to  any  part  of  the  country,  and  thus 
foreshadow  any  troublesome  times  in  the  country's  economic  life. 

The  next  chapter  leads  us  to  the  Federal  Reserve  Act  and  the 
defects  which  the  system  is  remedying.  Let  us  see,  therefore,  how  the 
I'ederal  Reserve  System  transformed  American  banking  from  decen- 
tralization to  a  basis  of  cooperative  and  centralized  control,  and  gave 
to  the  country  a  credit  system  far  superior  to  those  previously  existing. 


CHAPTER  III 

Banking  in  the  United  States  Under  the  Federal  Reserve  System 

Introduction  of  the  System;  Effect. — This  new  system  of  banking 
was  introduced  and  accepted  by  a  number  of  institutions  through- 
out the  country  in  the  belief  that  its  purposes  would  in  the  end 
prove  to  be  more  beneficial  to  them.  They  had  for  more  than  half 
a  century  performed  a  useful  service  to  American  commerce  and 
trade,  and  it  was  evident  that,  no  matter  how  thorough  a  system 
the  Federal  Reserve  purported  to  be,  it  could  not,  by  its  immediate 
introduction,  destroy  that  system  of  American  banking  with  its 
prestige  of  so  long  a  time  of  growth  and  usefulness.  The  Federal 
Reserve,  therefore,  was  introduced  gradually,  and  its  benefits  were 
made  to  be  realized  by  the  banks  of  the  country  step  by  step. 

Organization  of  the  Federal  Reserve ;  Centralized  Banking. — The 
Federal  Reserve  Act  provides  for  the  establishment  of  twelve  Federal 
Reserve  banks,  each  of  which  operates  in  one  of  the  Federal  Reserve 
Districts — twelve  in  all  into  which  the  country  is  divided.  The  min- 
imum capital  of  each  of  such  banks  required  by  law  is  four  million 
dollars,  and  the  subscriptions  to  stock  of  the  Federal  Reserve  banks 
are  required  to  be  taken  up  by  member  banks  to  the  extent  of  six 
per  cent,  of  their  capital  and  surplus. 

The  Federal  Reserve  System  is  on  the  whole  a  democratic  one, 
brought  out  most  strongly  by  the  fact  that  no  more  than  one  vote  is 
accorded  any  one  member  institution. 

National  banks  are  practically  compelled  to  become  members.  Va- 
rious laws  to  this  effect,  viz.,  non-recognition  of  any  such  national 
bank  as  a  satisfactory  government  depository,  should  it  refuse,  within 
thirty  days,  to  become  a  member  of  the  System,  and  still  further,  a 
provision  in  the  law  suspending  its  charter  in  the  event  it  failed  to 
become  a  member  within  one  year  from  the  passage  of  the  Act,  vir- 
tually forced  them  into  the  System.  While  this  is  true  of  national 
banks,  many  State  institutions  have  voluntarily  become  members. 

60 


Commercial  Banking  and  Credits  6i 

The  Federal  Reserve ;  Organization  and  Management. — Each  Fed- 
eral Reserve  bank  is  managed  by  a  board  of  directors,  consisting  of 
nine,  elected  in  the  following  manner:  Every  Federal  Reserve  Dis- 
trict comprises  a  number  of  banks,  which,  by  gradition,  are  divided 
according  to  their  capital,  into  three  groups,  consisting  of  as  many 
member  banks  the  capitalization  of  which  may  be  similar.  The  largest 
bank  in  the  group  of  little  banks,  is,  therefore,  normally  smaller  than 
the  smallest  one  in  the  group  of  middle-sized  banks,  and  the  largest 
one  in  the  group  of  middle-sized  banks  is  normally  smaller  than  the 
smallest  one  in  the  group  of  big  sized  banks.  One  vote  only  being 
accorded  to  any  one  bank,  each  group  is  required  to  elect  two  directors, 
one  of  whom  shall  be  a  banker  "representing  stockholding  banks," 
while  the  other  shall  be  a  business  man  representing  the  business  com- 
munity. The  first  are  denominated  directors  of  class  A,  and  the  sec- 
.ond,  directors  of  class  B.  To  these  six  directors  so  elected,  are  added, 
through  appointment  by  the  Federal  Reserve  Board  at  Washington, 
three  others  known  as  class  C  directors,  who  are  required  to  be  of 
tested  banking  experience.  Each  Federal  Reserve  bank  has,  therefore, 
a  board  of  nine  directors,  and  their  terms  of  office  run  for  three  years, 
one-third  of  which  expire  yearly. 

Federal  Reserve  Board  Heads  System, — The  Federal  Reserve  Board 
at  Washington  is  the  head  of  the  system  and  manages  and  super- 
vises the  operations  of  the  different  Reserve  banks  to  a  large  extent. 
Its  organization  includes  the  Secretary  of  the  Treasury  and  the 
Comptroller  of  the  Currency,  who  are  members  ex-officio,  five  others 
being  appointed  by  the  President  of  the  United  States,  with  the  advice 
and  consent  of  the  Senate,  the  latter  holding  office  for  a  period  of  ten 
years.  The  Chairman  of  the  Federal  Reserve  Board  is  the  Secretary 
of  the  Treasury.  An  advisory  head  is  appointed  by  the  board  of 
directors  of  each  Federal  Reserve  bank,  making  up  the  so-called  "Fed- 
eral Advisory  Council."  A  minimum  of  four  conferences  are  required 
to  be  held  yearly,  at  which  time  objects  of  general  discussion  are 
taken  up  and  settled. 

Operations  of  the  Federal  Reserve  System 

The  Centralization  and  Mobilization  of  District  Bank  Reserves. — 
Prior  to  the  adoption  of  the  Federal  Reserve  System,  all  national 
banks,  as  well  as  nearly  all  State  institutions,  were  required  to  keep 


62  Bank  and  Trade  Acceptances 

as  a  reserve  a  certain  percentage  of  their  deposits,  usually  between 
fifteen  per  cent,  and  twenty-five  per  cent.,  either  in  the  vaults  or  such 
banks  or  in  the  central  reserve  banks  denominated  as  such,  the  latter 
being  situated  in  the  larger  cities  of  the  country. 

On  June  31,  1917,  an  Amendment  was  passed  to  the  Federal  Reserve 
Act,  requiring  every  bank,  banking  association  or  trust  company  be- 
longing to  the  System,  to  maintain  its  entire  legal  reserve  in  the  form 
of  a  deposit  with  the  Federal  Reserve  bank  of  its  district.  Likewise, 
the  reserve  requirements  of  each  member  bank  were  materially  made 
lower  than  the  percentage  required  of  each  bank  before  the  adoption  of 
the  System.  This  alone  produced  a  great  benefit  to  the  country. 
Banks  were  able,  thereafter,  to  make  use  of  a  larger  amount  of  their 
deposits.  On  the  other  hand,  concentration  of  the  country's  reserve 
money  into  a  few  large  reservoirs  made  possible  a  much  more  efficient 
use  of  every  dollar  than  under  the  old  system  of  scattered  reserves. 

Use  of  Reserve  Money  by  Federal  Reserve  Banks. — The  Federal 
Reserve  Banks,  like  other  banks,  though  they  are  required  by  law  to 
maintain  a  reserve  of  thirty-five  per  cent,  against  deposits,  invest  such 
funds  in  a  way  believed  by  them  to  be  most  profitable  and  most  for  the 
public  good.  Further,  by  the  collection  of  such  reserves,  these  banks 
are  able  to  hold  them  in  readiness  in  the  form  of  money,  commercial 
paper  investments,  or  the  like,  so  that  in  the  event  a  need  for  money  is 
found  in  any  part  of  the  country,  the  mechanism  of  the  Reserve  Sys- 
tem enables  the  transfer  of  such  funds  from  places  of  redundancy  to 
places  of  scarcity,  without  any  delay  whatsoever. 

Inter-District  and  Intra-District  Mobility  of  Reserves. — We  may 
now  consider  what  is  known  as  the  inter-district  and  intra-district 
mobility  of  reserves.  The  former  term  signifies  the  mobility  of  re- 
serves from  one  Federal  Reserve  District  to  another,  and  the  latter, 
the  mobility  of  reserves  within  the  boundaries  of  one  district. 

Inter-District   Mobility 

The  mobilization  of  inter-district  reserves  is  brought  about  by  the 
three  following  means :  First,  by  the  rediscounting  of  one  Federal 
Reserve  bank  for  another  of  its  commercial  paper  and  other  evidences 
of  debt;  second,  the  open  market  transactions  of  the  Federal  Reserve 


Commercial  Banking  and  Credits  63 

banks ;  third,  the  creation  of  a  broader  discount  market  for  commer- 
cial paper. 

Rediscount  Operations  of  Reserve  Banks. — i.  Federal  Reserve 
banks  are  by  law  permitted  to  invest  their  funds  in  so-called  eligible 
paper  of.  a  high  standard,  and  in  this  way,  a  large  part  of  their 
reserves  are  employed.  Suppose,  now,  that  there  is  an  exceptionally 
heavy  demand  for  reserve  money  in  any  one  section  of  the  coun- 
try,— a  demand  which  is  heavier  than  the  banks  of  that  section 
can  reasonably  meet.  The  Reserve  banks  in  every  section  where 
money  is  more  plentiful  will  come  to  its  aid  either  voluntarily  or 
under  compulsion  of  the  Federal  Reserve  Board  at  Washington,  and 
will  rediscount  the  paper  of  the  Reserve  bank  in  the  section  under 
financial  stress.  This  process  will  cause  a  flow  of  cash  from  the  other 
Federal  Reserve  banks  of  the  country  to  the  Federal  Reserve  bank 
requiring  funds,  in  this  way  easing  the  money  market  in  the  threat- 
ened section. 

Advances  by  One  Federal  Reserve  Bank  to  Another, — During  the 
War,  a  practice  arose  amongst  Federal  Reserve  banks  to  extend  loans 
to  one  another,  due  largely  to  the  efforts  of  such  banks  to  finance 
issues  of  Government  war  loans.  The  practice  of  thus  extending  loans 
to  one  another  in  case  of  need  is  even  to-day  an  important  function 
of  the  Federal  Reserve  System. 

2.  Open  Market  Operations. — The  open  market  operations  of  the 
Federal  Reserve  banks  are  the  second  means  devised  for  the  mobili- 
zation of  reserves.  While  dealings  with  the  public  are  somewhat 
restricted,  it  is  provided,  however,  under  Section  14  of  the  Act,  that 
Federal  Reserve  banks  may  buy  and  sell  in  the  open  market,  either  in 
this  country  or  in  foreign  countries,  bills  of  exchange,  bankers'  accept- 
ances, and  other  specified  kinds  of  Government  obligations.  In  this 
way,  a  Federal  Reserve  bank  in  one  section  of  the  country  may  pur- 
chase and  sell  eligible  commercial  paper  and  other  government  secur- 
ities in  any  other  section  of  the  country,  thus  causing  a  flow  of  money 
from  the  district  of  the  buyer  to  the  district  of  the  seller,  or  from 
places  of  scarcity  to  places  of  redundancy. 

3.  Discount  Markets  for  Commercial  Paper. — The  third  and  most 
important  method  devised  for  the  inter-district  mobility  of  reserves  is 


64  Bank  and  Trade  Acceptances 

that  of  establishing  a  broader  discount  market  for  commercial  paper. 
Prior  to  the  adoption  of  the  Federal  Reserve  System,  the  country  had 
no  standard  form  of  commercial  paper,  as  for  instance,  of  the  class 
which  exists  in  the  countries  of  Europe. 

The  great  discount  market  of  London  and  that  of  France,  as  well 
as  the  other  European  financial  centers,  are  maintained  mainly  by  the 
circulation  of  credit  instruments  used  in  financing  domestic  and  for- 
eign trade  transactions,  similar  to  our  trade  and  bank  acceptances. 
The  Federal  Reserve  Board  was  quick  to  see  the  advantage  in  the 
employment  of  the  acceptance  as  a  standard  form  of  commercial  paper 
and  indicated  its  favoritism  by  discounting  them  at  a  better  rate  than 
single  name  paper.  The  Federal  Reserve  Board  has  standardized  the 
trade  acceptance  and  the  bank  acceptance  and  has  in  this  way  made 
them  the  basis  for  a  discount  market  for  the  country. 

The  Trade  Acceptance 

To  illustrate  a  trade  acceptance,  a  seller  of  merchandise  draws  his 
draft  upon  the  buyer,  say,  at  ninety  days  sight,  for  the  amount  of  the 
bill,  and  sends  it  along  with  the  invoice  of  merchandise  sold,  to  the 
buyer  for  acceptance.  The  buyer  then  signs,  or  accepts  this  draft 
drawn  upon  him,  whereby  a  credit  instrument  is  created.  From  the 
standpoint  of  the  seller,  he  has  acquired  a  definite  acceptance  of  the 
goods,  which  the  buyer  cannot  question  in  the  future  without  a  good 
reason,  and  he  has  a  promise  moreover  from  the  buyer  to  pay  at  a 
definite  date  a  specified  sum  equal  to  the  amount  of  the  invoice. 

The  trade  acceptance  has  great  advantages  over  the  open  account 
method  and  over  the  single  name  paper,  in  that  it  bears  two  names  and 
thus  gives  double  security,  which,  from  a  standpoint  of  the  banker, 
makes  it  more  preferable  as  an  item  of  investment.  A  trade  accept- 
ance, moreover,  can  be  discounted  at  the  bank  of  the  seller,  and  funds 
obtained  with  which  to  continue  the  conduct  of  his  business.  It  thus 
prevents  a  tie-up  of  capital  and  releases  the  tremendous  sums  tied  up 
in  idle  accounts.  The  buyer,  moreover,  obtains  an  advantage  through 
the  trade  acceptance,  in  that  the  reflection  upon  his  credit  becomes  an 
established  fact,  and  he  makes  it  known  that,  as  a  user  of  the  accept- 
ance, he  is  a  careful  buyer  and  not  an  over-buyer  of  merchandise,  so 
conducting  his  business  as  to  be  able  to  meet  his  obligations  when  due. 
He,  in  turn,  in  giving  trade  acceptances  to  others,  may  expect  the 


Commercial  Banking  and  Credits  65 

same  to  be  given  by  his  customers  to  himself,  which  he  could  then 
utilize  in  the  same  way. 

The  banker  is  not  subject,  in  his  investments  in  trade  acceptances, 
to  the  provisions  of  the  National  Banking  Law,  which  prohibits  a 
national  bank  from  lending  to  any  one  customer  an  amount  in  excess 
of  ten  per  cent,  of  the  banks  capital  and  surplus.  By  the  process  of 
rediscounting  with  the  Federal  Reserve  Banks,  the  banker  can  at  any 
time  obtain  funds  in  exchange  for  his  holdings  of  commercial  trade 
acceptances. 

The  Bank  Acceptance 

We  may  now  consider  the  bank  acceptance,  which  is  considered  a 
still  higher  form  of  commercial  paper.  Ordinarily,  the  credit  of  the 
bank  is  considered  to  be  higher  than  that  of  the  commercial  firm, 
which,  as  an  item  of  safety,  is  more  preferred  by  the  bankers  of  this 
country  and  by  the  Federal  Reserve  Banks  for  purposes  of  investment 
and  in  commercial  paper  dealings.  It  may  arise  in  the  following 
manner: 

The  seller,  instead  of  drawing  a  trade  acceptance  on  the  buyer,  has 
the  buyer  make  arrangements  with  his  bank  whereby  the  seller  may 
draw  upon  the  buyer's  bank  instead  of  upon  the  buyer  himself.  This 
ordinarily  gives  rise  to  a  bank  acceptance,  generally  regarded  as  a 
credit  instrument  of  the  highest  sort. 

The  discount  and  rediscount  of  commercial  paper,  principally  the 
trade  and  bank  acceptance,  tends  to  establish  equilibrium  in  reserves 
according  to  the  needs  of  each  district.  By  the  counterflow  of  bank 
reserves  from  the  cheaper  market  to  the  dearer  ones,  an  equilibrium 
in  discount  rates  is  as  well  maintained. 

I NTRA-Dl STRICT  MOBILITY  OF  RESERVES 

The  same  facilities  for  maintaining  equilibrium  in  both  reserves  and 
discounts  exist  in  the  case  of  intra-district  mobility  as  in  that  of  inter- 
district  mobility.  In  the  former,  the  banks  deal  directly  with  the 
Federal  Reserve  Bank  of  their  district,  and,  by  the  process  of  dis- 
counting and  rediscounting  the  commercial  paper  held  by  them,  they 
are  enabled  to  equalize  their  cash  investment  position.  Such  banks 
can  obtain  the  assistance  of  the  Federal  Reserve  Bank  by  the  discount 


66  Bank  and  Trade  Acceptances 

of  their  commercial  paper  holdings.  Banks,  moreover,  may  deal  with 
one  another,  limited,  however,  by  the  rules  and  regulations  prescribed 
by  the  Board  in  the  case  of  member  banks  of  the  System. 

In  this  way,  the  Federal  Reserve  has  given  to  the  country  an  elastic 
credit  system  and  has  laid  a  foundation  for  the  creation  of  a  discount 
market  for  commercial  paper. 

The  System  of  Credit  Expansion  Through  Federal  Reserve  Notes 

Issuance  of  National  Bank  Notes  by  Banks. — The  second  form 
of  credit  circulation  exists  in  the  issuance  of  Federal  Reserve 
bank  notes.  Before  the  adoption  of  the  Federal  Reserve  System, 
the  national  banks  had  obtained  the  privilege  of  note  circula- 
tion in  the  usual  way  then  provided  by  law,  that  is,  upon  the  deposit 
of  proper  security  in  the  form  of  Government  bonds  with  the  Comp- 
troller of  the  Currency.  National  banks  would  then  receive  the  priv- 
ilege of  issuing  their  notes  to  circulate  at  par.  The  practice  of  issu- 
ing national  bank  notes  was  very  much  indulged  in  by  the  national 
banks  as  it  secured  for  them  a  double  profit.  The  bonds  which  they 
were  required  to  deposit  with  the  Comptroller  of  the  Currency,  as 
security  for  the  issuance  of  national  bank  notes,  usually  paid  the 
bank  interest  at  the  rate  of  from  two  to  three  per  cent.  Upon  the 
amount  of  money  circulated  by  national  banks  in  the  form  of  bank 
notes  they  were  able  to  earn  a  full  six  per  cent.,  making  it  in  all  from 
eight  to  nine  per  cent,  on  their  investment,  less  taxes  of  about  one-half 
per  cent. 

Besides  the  profit  accruing  to  the  banks  from  their  issuance,  national 
bank  notes  served  as  one  of  the  most  important  mediums  of  credit 
circulation,  and  it  was  for  this  reason  that  the  Federal  Reserve  Board 
did  not  desire  immediately  to  withdraw  this  privilege  from  them,  but 
enacted  laws  looking  forward  to  their  gradual  retirement.  The  amount 
of  notes  so  outstanding  at  the  passage  of  the  Act  was  about  seven 
hundred  millions  of  dollars,  and  it  was  evident  that  the  contraction  of 
this  important  form  of  bank  credit  would  work  an  undue  hardship  on 
the  banks  as  well  as  on  business. 

Provisions  of  Federal  Reserve  re  Note  Issues. — The  Federal  Reserve 
Act  provided  for  the  issuance  of  Federal  Reserve  notes  to  be  (a), 
"a  first  and  paramount  lien  on  all  the  assets  of  the  Federal  Reserve 


Commercial  Banking  and  Credits  67 

Banks  issuing  them,"  and  (b),  "secured  by  collateral  of  the  highest 
grade  to  the  extent  of  one  hundred  per  cent,  of  the  value  of  circu- 
lation notes  issued."  The  collateral  secured,  upon  being  deposited 
with  either  the  Federal  Reserve  agents  in  the  various  districts,  or  with 
the  Federal  Reserve  Board  at  Washington,  secures  for  the  Federal 
Reserve  Banks  the  proceeds  in  Federal  Reserve  notes,  to  be  circulated 
by  them  as  an  item  of  credit. 

Character  of  Commercial  Paper. — The  required  commercial  paper 
must  be  of  the  following  classes : 

1.  Such  as  may  be  indorsed  by  member  banks  and  drawn  for  com- 
mercial, industrial,  or  agricultural  purposes,  or  drawn  for  the  purpose 
of  carrying  on  trading  in  securities  of  the  United  States  Government ; 

2.  Bills  of  exchange  indorsed  by  a  member  bank,  and  bankers'  ac- 
ceptances bought  by  the  Federal  Reserve  Banks  in  the  open  market; 

3.  Gold  and  gold  security  certificates. 

Security  in  the  Form  of  Gold. — Forty  per  cent,  of  the  amount  of 
Federal  Reserve  notes  issued  are  required  to  be  secured  by  gold, 
pledged  with  the  Federal  Reserve  agents  who  represent  the  Federal 
Reserve  Board  at  Washington,  and  who  are  stationed  at  the  Federal 
Reserve  banks.  The  security  may  also  be  placed  with  the  Treasury 
of  the  United  States  at  Washington. 

Expansion  and  Contraction  of  Reserve  Notes. — The  elasticity  of 
Federal  Reserve  notes  is  made  possible  by  the  easy  manner  in  which 
their  circulation  may  be  increased  in  times  of  need,  and  decreased  in 
times  when  their  circulation  is  not  necessary.  Member  banks  in 
any  section  of  the  country,  may,  at  times  require  an  increased 
supply  of  such  notes  to  meet  local  demands.  These  notes  may  be 
obtained  by  member  banks,  by  the  rediscount  of  "eligible  paper" 
with  their  Federal  Reserve  banks,  the  former  taking  the  pro- 
ceeds in  Federal  Reserve  notes,  thus  supplying  themselves  with  hand 
to  hand  as  well  as  "till"  money.  The  amount  of  notes  issued  by  the 
Federal  Reserve  banks  for  circulation  towards  the  end  of  1918 
amounted  to  over  two  billion  seven  hundred  and  fifty  million  dollars, 
secured  by  gold  to  the  extent  of  one  billion  one  hundred  and  fifty  mil- 
lion dollars,  and  eligible  paper  amounting  to  two  billions  of  dollars. 


68  Bank  and  Trade  Acceptances 

Not  only  may  member  banks  obtain  Federal  Reserve  notes  by  the 
rediscount  of  their  commercial  paper  holdings  with  the  Federal  Re- 
serve banks,  but  the  Federal  Reserve  banks  as  well,  are  enabled,  by 
the  process  of  discounting  with  the  Federal  Reserve  Board  to  acquire 
the  circulation  of  Federal  Reserve  notes  when  needed. 

The  contraction  of  Federal  Reserve  note  issues  as  an  item  of  credit 
is  brought  about  in  the  following  way :  After  they  have  served  their 
purpose  in  meeting  local  demands,  they  are  again  deposited  with  the 
banks,  which,  for  the  reason  that  the  latter  are  not  permitted  to  count 
such  notes  as  a  legal  reserve,  they  are  again  deposited  with  the  Federal 
Reserve  Bank  (Federal  Reserve  notes  are  not  legal  tender),  to  be  re- 
forwarded  by  them  to  Washington  for  retirement. 

Collateral  Loans 

It  so  happens  that  member  banks  have  at  times,  in  their  portfolios, 
large  amounts  of  commercial  paper  and,  at  different  times,  find  a  need 
for  money.  However,  as  they  are  unwilling  to  part  with  their  com- 
mercial paper,  knowing  that  they  might  require  such  loans  to  extend 
only  for  a  period  of  a  few  days,  an  amendment  to  the  Federal  Reserve 
Act  provides  for  short  time  collateral  loans  of  not  exceeding  fifteen 
days  which  can  be  made  by  the  Federal  Reserve  banks  to  member 
banks,  when  such  loans  are  secured  by  U.  S.  certificates  of  indebted- 
ness or  Liberty  bonds. 

Circulation  and  Contraction  of  Credit 

The  Federal  Reserve  System  was  primarily  introduced  for  the  pur- 
pose of  providing  a  sound  credit  system,  which,  through  the  various 
means  before  stated,  has  already  been  found  to  be  of  great  advantage 
to  the  people  of  the  country.  What  is  most  important  is  the  manner 
in  which  circulation  and  contraction  of  credit  may  be  controlled.  As 
to  the  former,  explanation  has  previously  been  made.  Regarding  the 
latter,  this  is  brought  about  by  the  pressure  of  high  discount  rates, 
which  virtually  compel  borrowers  to  pay  ofif  their  loans.  Should  this 
fail  or  halt  credit  over-extension,  additional  restrictions  placed  upon 
rediscounts  would  probably  be  recommended,  which  would  have  a 
direct  influence  upon  the  contraction  of  credit,  to  a  normal  condition. 


Commercial  Banking  and  Credits  69 

The  Domestic  Clearing  System 

Federal  Reserve  Banks  as  Clearing  Houses  for  Members. — The 
Federal  Reserve  Act  has  established  a  domestic  clearing  system 
for  the  country.  Under  the  Act,  Federal  Reserve  banks  are  empow- 
ered to  act  as  clearing  houses  for  members.  This  work  of  clearing 
and  collecting  can  be  better  accomplished  through  the  Federal  Re- 
serve banks,  which  are  in  direct  relation  between  debtor  and  creditor 
banks,  and  standing  between,  act  for  both. 

Operation  of  the  Clearing  System. — The  present  clearing  and  col- 
lection system  as  it  operates  under  the  Federal  Reserve  Act  may  be 
briefly  summarized  as  follows :  Each  Federal  Reserve  bank  is  per- 
mitted by  the  Act,  to  exercise  the  functions  of  a  clearing  house  in 
its  district  for  member  banks  and  for  qualified  non-member  banks, 
known  as  clearing  member  banks. 

Every  Federal  Reserve  bank  receives  on  deposit  at  par  from  member 
banks  or  from  Federal  Reserve  banks  checks  and  drafts  drawn  upon 
any  of  its  depositors,  and  when  remitted  by  a  Federal  Reserve  bank, 
checks  and  drafts  drawn  by  any  depositor  in  any  other  Federal  Re- 
serve bank  or  member  bank  upon  funds  to  the  credit  of  said  depositor 
in  said  Reserve  bank  or  member  bank.  Member  banks  are  not  re- 
stricted from  charging  actual  expenses  incurred  in  collecting  and  remit- 
ting funds,  or  for  exchange  sold  to  their  patrons.  The  Federal  Reserve 
Bank  fixes  the  charges  to  be  collected  by  the  member  bank  from  its 
patrons  whose  checks  are  cleared  through  the  Federal  Reserve  Bank 
and  the  charge  which  may  be  imposed  for  the  service  of  clearing  or 
collection  rendered  by  the  Federal  Reserve  Bank. 

The  Gold  Settlement  Fund 

Operation  of  Gold  Settlement  Fund. — ^The  inter-district  clearings 
of  Federal  Reserve  banks  are  brought  about  by  the  "Gold  Settle- 
ment Fund."  The  provisions  in  the  Act  relating  to  this  function 
of  the  system  requires  each  Federal  Reserve  bank  to  keep  on  deposit, 
with  the  Treasury  at  Washington,  or  the  nearest  sub-treasury  of  the 
United  States,  for  credit,  to  the  amount  of  the  "Gold  Settlement  Fund" 
one  million  dollars  in  gold  or  gold  certificates,  and,  in  addition,  an 
amount  equal  at  least  to  its  indebtedness  due  to  all  Federal  Reserve 
banks. 


70  Bank  and  Trade  Acceptances 

How  Settlements  are  Effected. — The  settlement  of  balances  between 
Federal  Reserve  banks  is  effected  daily  through  the  instrumentality 
of  telegrams  sent  to  the  Board  at  Washington,  where  transfers  of 
deposits  and  credits  on  the  books  of  the  "Gold  Settlement  Fund"  are 
effected.  This  has  brought  about  a  decided  advantage  to  the  banks 
of  the  country.  It  has  lowered  the  actual  amount  of  funds  required 
for  clearing  purposes  and  has  greatly  reduced  the  cost  of  transporting 
large  sums  of  money  from  one  place  to  another  to  effect  such  settle- 
ments. 

Financing  Foreign  Trade — Dollar  Exchange 

Dollar  Exchange  Provided  For  by  Act. — The  Federal  Reserve  Act 
has  provided  through  its  rediscount  machinery  expanded  facilities  for 
the  financing  of  American  foreign  trade  directly  by  dollar  exchange, 
that  is,  by  bills  drawn  on  banks  and  business  houses  in  the  United 
States,  and  payable  in  dollars,  as  distinguished  from  those  drawn 
upon  foreign  centers  in  pounds  sterling  or  other  European  currency. 

Dollar  Credits  Come  Into  Use. — Prior  to  the  adoption  of  the  system, 
by  far  the  major  portion  of  international  commerce  was  financed  by 
means  of  the  English  standard,  as  a  result  of  which  millions  of  dollars 
in  interest  and  commissions  were  paid  to  the   English  institutions. 

As  a  result  of  the  Great  War  and  the  introduction  of  the  Federal 
Reserve  System,  coupled  with  the  dislocation  of  the  machinery  of 
foreign  exchange  in  the  financial  centers  of  Europe,  dollar  credits 
came  into  large  use. 

Importance   of    Dollar   Credits   to   American    Importer. — For   the 

importer  in  this  country  the  use  of  dollar  credits  is  most  economical, 
since  the  risk  element  in  the  fluctuation  of  exchange  is  eliminated. 
The  importer  knows  that  the  amount  which  he  has  to  pay  will 
be  in  dollars,  the  cost  of  which  always  remain  the  same.  Now 
that  there  has  been  created  a  market  for  such  paper,  which  is  eligible 
for  rediscount  with  the  Federal  Reserve  banks,  the  other  banks  of  the 
country  are  willing  to  buy  this  class  of  credit  paper,  which  assists 
greatly  the  foreign  trade  progress  of  the  country. 


Commercial  Banking  and  Credits  ^i 

Establishment  of  Foreign  Agencies.— The  Federal  Reserve  Act  has 

provided,  further,  for  the  establishment  of  various  agencies  with 
governmental  banking  institutions  abroad,  particularly  those  of 
England,  France,  Italy,  Japan,  Sweden,  the  Philippines,  etc. 

Up  till  a  very  recent  date,  national  banks  were  permitted,  provid- 
iding  their  capital  was  one  million  dollars  or  more,  to  establish  branch 
banks  abroad  for  the  assistance  of  American  foreign  trade  merchants. 
With  the  passage  of  the  Edge  Act  for  foreign  financing,  the  national 
and  member  banks  of  the  system  have  received  a  direct  advantage 
in  that  they  may  now  participate  in  the  ownership  by  stock  of  corpo- 
rations which  may  be  organized  for  the  purpose  of  accepting,  discount- 
ing and  rediscounting  commercial  paper  in  connection  with  American 
foreign  trade.  (Refer  Part  V,  "Foreign  Financing  Under  the  Edge 
Act"). 

The  Federal  Reserve  System  and  the  Federal  Treasury 

Prior  to  the  adoption  of  the  Federal  Reserve  System,  there  was  no 
mutuality  between  the  national  treasury  and  the  national  banks. 
Under  the  old  system,  the  Government  deposited  its  funds  with  thou- 
sands of  national  banking  institutions  throughout  the  country.  It  was 
thought,  before  the  enactment  of  the  law,  that  it  would  be  well  to 
withdraw  the  deposits  from  the  thousands  of  banks  wherein  they 
were  lodged,  and  consolidate  them  within  the  Federal  Reserve  banks. 
However,  due  to  the  entry  of  the  United  States  into  the  war,  and  the 
great  assistance  rendered  by  the  banks  throughout  the  country  in 
floating  Liberty  loans,  assisted  as  they  were  in  this  purpose  to  a  great 
extent  by  the  deposits  of  the  United  States  Government,  a  transfer  of 
this  kind  was  out  of  the  question.  Now,  that  the  country  is  passing 
from  a  period  of  war  financing  to  somewhat  more  normal  times,  it  is 
therefore,  a  matter  of  speculation  as  to  what  will  be  the  Government's 
policy  in  connection  with  the  funds  of  the  United  States  Government 
after  the  abnormal  conditions  have  passed  away. 

Functions  of  Federal  Reserve  System 

An  interesting  account  of  the  functions  of  the  Reserve  banks  is  con- 
tained in  the  "First  Annual  Report  of  the  Federal  Reserve  Board  of 
December,  1914,"  quoted  in  part  as  follows: 


72  Bank  and  Trade  Acceptances 

The  question  naturally  suggests  itself  and  must  be  frankly  faced : 
What  is  the  proper  place  and  function  of  the  Federal  Reserve  banks 
in  our  banking  and  credit  system?  On  the  one  hand  it  is  represented 
that  they  are  merely  emergency  banks  to  be  resorted  to  for  assistance 
only  in  times  of  abnormal  stress,  while  on  the  other  it  is  claimed  that 
they  are  in  essence  simply  additional  banks  which  should  compete 
with  the  member  banks,  especially  with  those  of  the  greatest  power. 
The  function  of  a  reserve  bank  is  not  to  be  identified  with  either  of 
these  extremes,  although  occasions  may  arise  when  either  of  such 
courses  may  be  imperative.  Its  duty  plainly  is  not  to  await  emer- 
gencies but,  by  anticipation,  to  do  what  it  can  to  prevent  them.  So 
also,  if,  at  any  time,  commerce,  industry,  or  agriculture  is,  in  the  opin- 
ion of  the  Federal  Reserve  Board,  burdened  unduly  with  excessive 
interest  charges,  it  will  be  the  clear  and  imperative  duty  of  the  Reserve 
Board,  acting  through  the  discount-rate  and  open-market  powers,  to 
secure  a  wider  diffusion  of  credit  facilities  at  reasonable  rates.  The 
Federal  Reserve  banks  are  the  holders  of  a  large  part  of  the  banking 
reserves  of  the  nation,  the  foundation  of  its  banking  structure.  Noth- 
ing should  be  permitted  in  the  operation  of  the  Reserve  banks  which 
would  w^eaken  this  foundation.  The  resources  of  a  Reserve  bank,  to 
be  useful  for  its  peculiar  purposes,  should  always  be  readily  available. 
It  follows,  therefore,  that  they  should  be  mainly  invested  in  such  short- 
term  liquid  investments  as  can  be  easily  converted  into  cash  as  occa- 
sion may  require.  This  conception  of  a  Reserve  bank,  moreover,  im- 
plies that  its  investments  should  be  marshaled  in  a  steady  succession 
of  maturities,  so  that  it  may  at  all  times  as  nearly  as  possible  prove 
equal  to  the  situation. 

The  ready  availability  of  its  resources  is  of  supreme  importance  in 
the  conduct  of  a  Reserve  bank.  Only  then  can  it  become  a  safe  and  at 
the  same  time  flexible  instrument  of  guidance  and  control,  a  regulator 
of  interest  rates  and  conditions.  Only  then  will  it  constantly  carry 
the  promise  of  being  able  to  protect  business  against  the  harmful 
stimulus  and  consequences  of  ill-advised  expansions  of  credit  on  the 
one  hand  or  against  the  menace  of  unnatural  restrictions  and  unneces- 
sary contractions  on  the  other,  with  exorbitant  rates  of  interest  and 
artificial  stringencies.  It  should  at  all  times  be  a  steadying  influence, 
leading  when  and  where  leadership  is  requisite,  but  never  allowing 
itself  to  become  an  instrument  for  the  promotion  of  the  selfish  inter- 
est of  any  private  or  sectional  group,  be  their  aims  and  methods  open 
or  disguised.  It  should  never  be  lost  to  sight  that  the  Reserve  banks 
are  invested  with  much  of  the  quality  of  a  public  trust.  They  were 
created  because  of  the  existence  of  certain  common  needs  and  inter- 
ests, and  they  should  be  administered  for  the  common  welfare — for 
the  good  of  all. 

The  more  complete  adaptation  of  the  credit  mechanism  and  facil- 
ities of  the  country  to  the  needs  of  industry,  commerce,  and  agricul- 
ture— with  all  their  seasonal  fluctuations  and  contingencies — should 


Commercial  Banking  and  Credits  73 

be  the  constant  aim  of  a  Reserve  bank's  management.  To  provide  and 
maintain  a  fluid  condition  of  credit,  such  as  will  make  of  the  Reserve 
banks  at  all  times  and  under  all  conditions  institutions  of  accommoda- 
tion in  the  larger  and  public  sense  of  the  term,  is  the  first  responsibility 
of  a  Reserve  bank. 

It  should  not,  however,  be  assumed  that  because  a  bank  is  a  Reserve 
bank  its  resources  should  be  kept  idle  for  use  only  in  times  of  diffi- 
culty, or.  if  used  at  all  in  ordinary  times,  used  reluctantly  and  spar- 
ingly. Neither  should  it  be  assumed  that  because  a  Reserve  bank  is 
a  large  and  powerful  bank  all  its  resources  should  be  in  use  all  the 
time  or  that  it  should  enter  into  keen  competition  with  member  banks, 
distributing  accommodation  with  a  free  and  lavish  hand  in  under- 
taking to  quicken  unwisely  the  pace  of  industry.  Such  a  policy  would 
be  sure,  sooner  or  later,  to  invite  disaster.  Time  and  experience  will 
show  what  the  seasonal  variations  in  the  credit  demands  and  facilities 
in  each  of  the  Reserve  banks  of  the  several  districts  will  be  and  when 
and  to  what  extent  a  Reserve  bank  may,  without  violating  its  special 
function  as  a  guardian  of  banking  reserves,  engage  in  banking  and 
credit  operations.  The  Reserve  banks  have  expenses  to  meet,  and 
while  it  would  be  a  mistake  to  regard  them  merely  as  profit-making 
concerns  and  to  apply  to  them  the  ordinary  test  of  business  success, 
there  is  no  reason  why  they  should  not  earn  their  expenses,  and  a  fair 
profit  besides,  without  failing  to  exercise  their  proper  functions  and 
exceeding  the  bounds  of  prudence  in  their  management.  Moreover, 
the  Reserve  banks  can  never  become  the  leading  and  important  factors 
in  the  money  market  which  they  were  designd  to  be  unless  a  con- 
siderable portion  of  their  resources  is  regularly  and  constantly  em- 
l)loyed. 

There  will  be  times  when  the  great  weight  of  their  influence  and 
resources  should  be  exerted  to  secure  a  freer  extension  of  credit  and  an 
easing  of  rates  in  order  that  the  borrowing  community  shall  be  able 
to  obtain  accommodation  at  the  lowest  rates  warranted  bv  existing 
conditions  and  be  adequately  protected  against  exorbitant  rates  of 
interest.  There  will  just  as  certainly,  however,  be  other  times  when 
prudence  and  a  proper  regard  for  the  common  good  will  require  that 
an  opposite  course  should  be  pursued  and  accommodations  curtailed. 
Normally,  therefore,  a  considerable  proportion  of  its  resources  should 
always  be  kept  invested  by  a  Reserve  bank  in  order  that  the  release 
or  withdrawal  from  active  employment  of  its  banking  funds  may  al- 
ways exercise  a  beneficial  influence.  This  is  merely  saying  that  to 
influence  the  market  a  Reserve  bank  must  always  be  in  the  market, 
and  in  this  sense  Reserve  banks  will  be  active  banking  concerns  when 
once  they  have  found  their  true  position  under  the  new  banking  con- 
ditions. 

It  would  be  a  mistake,  therefore,  and  a  serious  limitation  of  their 
usefulness  to  regard  the  Reserve  banks  simply  as  emergency  banks. 
Regulation  in  ordinary  times,  as  well  as  protection  in  extraordinary 


74  Bank  and  Trade  Acceptances 

times,  may  be  expected  to  become  the  chief  service  which  these 
institutions  will  perform.  The  Federal  Reserve  Board  is  fully  alive 
to  its  opportunities  and  responsibilities  in  this  respect,  but  it  must 
counsel  patience  in  awaiting  the  fruition  of  the  new  system.  It  will 
take  time  for  the  new  banks  to  develop  the  technique  of  control  and 
skill  and  experience  in  its  application.  The  ascertainment  of  the  cor- 
rect base  from  which  comprehensive  operations  should  begin,  the 
establishment  of  a  normal  level  from  which  expansions  and  contrac- 
tions will  freely  take  place,  will  have  a  most  important  bearing  upon 
the  future  development  and  success  of  the  system.  Impatience  to 
show  results  should  not  be  permitted  to  tempt  those  in  charge  of  the 
Reserve  banks  into  precipitate  and  unwise  action. 

The  vast  and  complex  structure  of  modern  banking  and  credit  sys- 
tems is  one  of  extreme  delicacy  of  balance  and  adjustment,  and  it  must 
never  be  overlooked  that  it  is  highly  sensitive  to  all  manner  of  dis- 
turbances, as  recent  events  have  painfully  demonstrated.  The  bank- 
ing systems  of  the  larger  nations  are  closely  related  to  one  another, 
and  financial  distress  or  collapse  at  one  point  quickly  transmits  shock 
to  all  others.  Safety  for  us  in  critical  times  will  depend  on  the  con- 
fidence our  system  commands,  the  strength  of  its  reserves,  and  its 
power  to  bring  them  into  action  promptly  and  effectively  if  needed. 

In  dealing  with  new  districts  and  entirely  changed  banking  methods, 
times  and  experience  alone  can  supply  the  data  necessary  for  chart- 
ing the  course  to  be  pursued.  This  consideration,  if  nothing  else, 
would  suggest  the  greatest  patience  and  prudence,  even  if  the  Euro- 
pean horizon  were  less  clouded  than  it  is  to-day.  None  the  less,  the 
Board  realizes  that  where  extraordinary  conditions  warrant  extra- 
ordinary measures  it  is  the  foremost  duty  of  the  Board  and  the  banks 
to  act  promptly  and  boldly. 


PART  I 

CHAPTER  IV 
BANKING  AND  CREDITS  IN  EUROPE 


THE  BANKING  SYSTEMS  OF 

ENGLAND 

FRANCE 

GERMANY 


PART  I 

CHAPTER  IV 

Banking  and  Credits  in  Europe 
The  Banking  and  Credit  Systems  in  England,  France  and  Germany 
Organisation  of  the  Banking  Systems  in  England,  France  and  Germany 

INTRODUCTION 

In  order  that  we  may  learn  by  what  methods  the  great  European 
nations  have  developed  their  banking  systems  to  their  present  state 
of  usefulness  and  importance,  it  would  be  well  to  consider  separately 
the  central  banks  of  England,  France  and  Germany,  and  their  modes 
of  operation,  as  a  means  of  comparison  with  the  Federal  Reserve 
System  of  the  United  States,  and  as  a  further  means  of  seeing  how,  in 
practice,  these  foreign  banking  systems  are  made  to  reach  their 
desired  ends. 

The  banking  systems  in  England,  France  and  Germany  are  organ- 
ized under  the  central  banking  principle,  with  more  or  less  direct 
supervision  by  the  relative  governmental  powers,  which  exercise  a 
direct  control  over  their  operations,  and  at  times  take  an  active  part  in 
the  management  of  their  affairs. 

The  Development  of  English  Commerce  and  Finance 

Early  stages  of  development. — England  has  always  been  known  as 
a  commercial  power,  and  more  so  as  a  maritime  power.  In  the  early 
stages  of  English  commerce,  facilities  afforded  by  English  enterprise 
to  the  commercial  world,  in  the  way  of  transportation  by  ocean  car- 
riage, attracted  a  large  number  of  merchants  from  all  nations.  This 
advantage  over  other  trading  countries  brought  great  volumes  of 
business  to  England,  and  as  a  result,  her  merchants  became  very 
wealthy. 

77 


78  Bank  and  Trade  Acceptances 

England  Decomes  a  financial  center. — To  meet  the  demands  arising 
from  increased  trade  and  commerce,  banking  and  financial  institutions 
performing  every  function  of  finance  were  from  time  to  time  called 
into  being  and  developed,  thus  making  London  a  great  financial  power 
and  virtually  a  clearing  house  for  international  settlements  and  a  place 
of  deposit  for  bankers  and  merchants  all  over  the  world. 

The  English  banks,  further,  by  the  establishment  of  numerous 
branches  in  all  parts  of  the  civilized  world  brought  home  to  the 
merchant  of  English  nationality  abroad  a  direct  means  of  assistance, 
and  the  commerce  that  this  particular  country  carried  on  until  the 
outbreak  of  the  war  was  far  in  excess  of  that  of  any  other  nation. 

The  pound  sterling. — With  this  increasing  wealth  and  by  reason  of 
England's  financial  ability  to  finance  the  trade,  not  only  of  England 
and  the  colonists,  but  of  other  nations  as  well,  the  pound  sterling, 
which  is  the  English  standard  of  money,  was  formally  established  and 
came  to  be  used  in  preference  to  all  other  forms  of  currency  as  a  basis 
for  exchange.  Thus,  a  transaction  between  Brazil  and  England  in- 
volving a  shipment  of  coffee,  or,  a  transaction  between  China  and  Eng- 
land involving  a  shipment  of  tin,  or,  a  transaction  between  Japan  and 
America  involving  a  shipment  of  silk,  would  in  the  majority  of  inter- 
national transactions  necessitate  the  drawing  of  a  bill  on  London,  and 
for  the  acceptance  of  this  draft,  London  bankers  would  charge  a  round 
commission. 

The  reason  for  this  preferred  use  by  foreign  merchants  of  the  pound 
sterling  as  a  medium  of  exchange  in  international  trade  transactions, 
was  that  a  bill  drawn  in  the  English  standard  of  currency  could  always 
be  converted  into  the  local  currency  of  any  country  at  a  close  rate  of 
exchange ;  whereas,  bills  drawn  in  the  currency  of  other  countries 
would  have  no  such  sfood  markets. 


fe^ 


Banking  and  Credits  in  England 

Bank  of  England  the  Central  Banking  Institution 

The  Bank  of  England,  founded  in  1694,  is  the  head  and  central 
figure  of  the  English  banking  system,  having  the  full  support  of  the 
Government  and  receiving  such  support  whenever  it  feels  it  necessary 
to  have  it 


Commercial  Banking  and  Credits  79 

ORGANIZATION    OF   THE    ENGLISH    BANKING   SYSTEM; 

RESERVES 

The  Bank  of  England 

The  Central  Bank  of  England  is  managed  by  a  Board  of  Directors. 
It  maintains  eleven  branches,  two  located  within  the  confines  of  Lon- 
don and  nine  within  the  provinces.  The  Bank  of  England  is  the 
holder  of  the  country's  reserves,  in  the  same  way  in  which  in  this 
country,  the  Federal  Reserve  banks  are  the  holders  of  a  certain  per- 
centage of  the  reserves  of  the  national  and  member  banks  of  the 
System.  In  England,  however,  the  central  bank  is  not  by  any  means 
the  only  reserve  depository.  Some  of  the  outlying  banks  in  country 
places  deposit  their  reserves  with  the  central  institutions  in  their 
respective  localities,  which,  in  turn,  may  lodge  their  reserves  with  the 
metropolitan  banks,  which  again  may  deposit  their  own  reserves  with 
the  Bank  of  England.  In  this  connection,  the  Bank  of  England  may 
be  said  to  be  a  bank  for  bankers,  as  are  the  Federal  Reserve  banks  in 
the  United  States. 

The  Bank  of  England  has  many  clients  of  its  own,  thus  coming  into 
direct  competition  with  the  other  banks  of  the  country.  Competition 
in  English  banking  is  very  keen.  The  Bank  of  England,  furthermore, 
is  the  only  note  issuing  bank  in  the  country,  enjoying  practically 
monopolistic  powers.  It  is  engaged  principally  in  the  business  of  re- 
discounting,  and  lending  on  the  paper  of  banks,  firms,  individuals  and 
others. 

Joint  Stock  Banks;  Branch  Banking 

Joint  Stock  banks  exist  in  London.  The  largest  of  these  joint  stock 
banks,  to  the  extent  of  about  twelve  in  all,  together  with  the  Bank  of 
England,  are  said  to  control  the  banking  operations  of  the  country. 
This  is  made  possible  by  the  establishment  and  maintenance  of  many 
hundreds  of  branches  throughout  the  world,  controlled  by  such  large 
Joint  Stock  companies.  In  England,  the  business  of  these  Joint  Stock 
companies  and  other  incorporated  banking  institutions  is  mainly  that 
of  receiving  deposits  and  making  loans  and  discounts. 


8o  Bank  and  Trade  Acceptances 

Private  Bankers;  Merchant  Banks;  Acceptance  Firms 

Private  bankers  exist  in  England  in  large  numbers,  these  being  very 
powerful.  There  are  also  in  existence  various  so-called  "merchant 
banks"  and  "acceptance  firms,"  the  business  of  the  latter  being  con- 
fined mainly  to  the  acceptance  of  bills  on  commission,  though  at  times, 
they  engage  in  the  business  of  lending  money  in  the  English  market. 

Discount  Houses 

Discount  houses  follow,  being  important  factors  in  the  English  dis- 
count market.  As  they  specialize  in  their  operations  in  the  business 
of  discounting  bills  of  exchange  and  acceptances,  they  render  a  very 
important  service  to  the  English  banks  and  commercial  firms.  The 
private  bankers  of  the  country,  at  times,  deposit  large  sums  of  money 
with  these  discount  houses  to  be  loaned  out  and  used  in  the  business 
of  discounting  commercial  paper.  The  discount  houses  also  engage 
in  syndicate  operations  and  in  lending  on  stock  exchange  collateral. 

Investing  and  Finance  Houses 

Another  important  class  of  institutions  in  the  English  banking  sys- 
tem comprises  the  "investing  and  finance  houses,"  which  are  very 
numerous  throughout  the  country,  being  situated  principally  in  Lon- 
don. They  engage  extensively  in  foreign  financing,  exchange  opera- 
tions, and  general  investing  operations.  They  finance  industrial  and 
mercantile  firms,  public  utilities,  and  other  enterprises.  As  a  class 
they  have  at  their  command  large  sums  of  money  which  find  their 
way  into  the  English  money  market. 

Commercial  Paper  in  England 

Classes  of  eligible  bills. — The  system  of  credit  expansion  in  Eng- 
land involves  both  discounts  and  loans.  The  Bank  of  England  may 
determine  without  interference  what  is  acceptable  paper  for  redis- 
count. It  is  a  well  established  fact  that  the  Bank  will  buy  only  paper 
with  two  British  names,  one  of  which  must  be  that  of  the  acceptor, 
and  the  maturity  of  which  bills  are  not  more  than  four  months  from 
date  of  acceptance.  This  is  the  only  class  of  eligible  paper.  In  ex- 
treme cases,  however,  the  banks  may  purchase  six  months'  bills. 


Gdmmercial  Banking  and  Credits  8i 

Bank  and  Trade  Acceptances  the  Chief  Forms  of  Commercial  Paper  in 

England 

Bank  acceptances  used  most  extensively. — The  commonest  forms 
of  bills  in  England  are  those  known  as  "Bankers'  Acceptances."  It  may- 
be said,  by  way  of  definition,  that  they  are  bills  drawn  by  sellers  of 
merchandise  on  bankers,  the  latter  accepting  the  bills  as  agents  of 
the  buyers.  This  is  the  usual  manner  in  which  English  banks  assist 
in  the  financing  of  trade  and  commerce.  They  are  similar  to  the 
American  Bankers'  Acceptances  arising  in  the  same  manner.  The 
"bank  acceptance"  is  based  generally  upon  an  agreement,  whereby 
the  firm,  in  this  instance  the  buyer,  is  required  to  furnish  the  bank 
with  funds  before  maturity.  The  bank  here  does  not  lend  its  money, 
but  rather  its  credit,  and  is  provided  with  funds  beforehand  with  which 
to  meet  the  acceptance  upon  presentation  for  payment.  The  bank 
accepting  the  draft  acts  as  agent  for  the  buyer,  and  takes  control  of 
the  goods,  turning  them  over  to  the  latter  against  a  "letter  of  trust." 
The  acceptor,  on  the  other  hand,  gains  a  very  great  advantage  in  this 
way. 

An  acceptance  by  a  high-class  English  bank  is  sure  to  find  a  ready 
market  and  will  sell  at  a  much  higher  rate  of  exchange  than  drafts 
drawn  in  any  other  currency.  By  reason  of  the  extensive  use  of  the 
acceptance  in  England,  a  market  for  this  class  of  paper  exists  at  all 
times,  which  directly  benefits  alike  the  manufacturer,  the  merchant, 
the  trader,  the  banker,  the  investor,  and  generally,  the  commercial 
public. 

Trade  acceptances  a  very  important  form  of  commercial  credit. — 
"Trade  acceptances,"  or  drafts  drawn  by  a  seller  of  goods  and  accepted 
by  the  buyer  also  comprise  an  important  class  of  credit  instruments 
eligible  for  rediscount  with  the  Bank  of  England.  Paper  of  this  class 
bears  in  all  cases  a  minimum  of  two  names.  Single  name  paper,  which 
is  the  kind  used  in  the  United  States  generally,  is  in  the  credit  systems 
of  Europe,  hardly  recognized. 

The  English  banks,  discount  and  financial  houses,  are  quick  to  take 
up  commercial  paper  of  this  class  for  discount  and  investment  pur- 
poses, knowing  that  they  have  at  all  times  a  ready  market  for  their 
disposition  if  they  should  happen  to  be  in  need  of  funds.  The  great 
advantage,  however,  lies  in  the  fact  that  by  their  use,  billions  of  del- 


82  Bank  and  Trade  Acceptances 

lars,  otherwise  tied  up  and  awaiting  settlement  in  the  form  of  time 
accounts,  are  released  to  the  benefit  of  the  merchant  and  the  manu- 
facturer, and  the  burden  of  financing  the  country's  trade  and  com- 
merce is  thereby  shifted  to  the  banker,  where  it  properly  belongs. 
This  can  best  be  accomplished  by  the  maintenance  of  a  broad  discount 
market,  such  as  exists  in  England — a  discount  market  which  is  capable 
of  collecting  and  controlling  the  resources  and  funds  of  the  nation 
and  making  them  available  at  all  times  where  they  are  most  needed. 

Other  Classes  of  Commercial  Paper  and  Acceptances 

The  Documentary  Bill  of  Exchange 

Bills  of  exchange. — A  bill  of  exchange  has  been  defined  as  an  un- 
conditional order  in  writing,  addressed  by  one  person  (the  drawer) 
to  another  (the  drawee),  signed  by  the  drawer,  and  requiring  the 
drawee  to  pay  on  demand  or  at  a  determinable  future  date,  a  sum 
certain  in  money,  to  the  order  of  a  specified  person  or  to  bearer. 

Bills  of  exchange;  how  classified. — Bills  of  exchange  are  issued  in 
various  varieties  of  form.  They  are  named  and  may  be  classified  ac- 
cording to  the  time  they  have  to  run,  according  to  the  financial  stand- 
ing of  the  parties  to  them,  and  also  according  to  the  purpose  for  which 
they  are  created. 

Demand  and  sight  bills;  short  and  long  bills. — Demand  and  sight 
bills,  short  and  long  bills,  are  included  among  the  first  class  above 
mentioned.  The  former  are  payable  upon  presentation  to  the  drawee. 
Short  bills  are  payable  from  one  to  thirty  days  after  sight  or  accept- 
ance, and  long  bills  at  longer  intervals,  usually  not  exceeding  four 
months. 

Prime  bills;  ordinary  bills. — Bills  are  also  divided  into  prime  bills 
and  ordinary  bills,  indicating  the  credit  in  the  business  world  which 
the  drawer  and  the  acceptor  enjoy.  The  former  are  drawn  by  the 
prominent  banking  and  commercial  houses,  usually  upon  banks,  and 
the  latter  by  those  and  upon  those  not  so  well  known.  Prime  bills 
generally  sell  at  higher  rates  than  ordinary  bills. 


Commercial  Banking  and  Credits  83 

Grain,  cotton  and  finance  bills ;  documentary  bills. — Classified  ac- 
cording to  the  purposes  of  their  issue  are  grain  bills,  cotton  bills  and 
finance  bills.  Included  also  among  documentary  bills  are  such  bills 
as  may  be  drawn  upon  importers  or  their  agents  against  shipments  of 
grain  or  other  merchandise.  They  are  known  as  documentary  bills, 
by  reason  of  the  papers  which  are  attached  evidencing  the  shipment 
and  carrying  title  thereto.  Such  documents  generally  include  a  bill 
of  lading,  a  certificate  of  insurance,  an  invoice,  and  a  certificate  of 
hypothecation.  The  last  named  certificate  recites  that  the  "seller  has 
sold  to  the  bank  a  bill  of  exchange  drawn  for  so  much  currency, 
against  the  drawee,  against  a  shipment  of  goods,  as  per  bill  of  lading 
accompanying."  Then  follows  an  agreement  with  the  bank  or  any 
holder  of  the  bill  for  the  time  being,  under  which  the  bill  of  lading  is 
lodged  as  collateral  security  against  the  acceptance  and  payment  of  the 
bill.  In  the  event  of  non-acceptance  or  non-payment,  it  is  agreed  that 
the  goods  may  be  sold  and  the  proceeds  applied  towards  payment.  A 
certificate  of  hypothecation  may  be  attached  to  each  and  every  bill,  or 
a  general  hypothecation  power  furnished  the  banker  to  cover  all  trans- 
actions. 

Drafts  and  documents  are  issued  in  duplicate  and  sometimes  in 
triplicate  sets,  one  set  being  forwarded  by  the  first  outgoing  steamer 
and  the  other  by  steamer  sailing  later. 

When  the  financial  standing  of  the  acceptor  of  a  documentary  bill 
of  exchange  is  unquestioned,  documents  will  generally  be  surrendered 
upon  acceptance.  If  the  credit  standing  of  the  acceptor  is  not  very 
satisfactory,  especially  in  the  case  of  shipments  of  perishable  merchan- 
dise, where  it  is  necessary  that  possession  of  the  goods  be  obtained 
promptly,  documents  are  generally  retained  by  the  collecting  agent 
and  delivered  only  upon  payment. 

Documentary  acceptance,  and  documentary  payment  bills. — When 
drafts  are  deliverable  only  upon  acceptance,  the  draft  is  known  as  a 
documentary  acceptance  bill ;  when  deliverable  only  upon  payment, 
the  draft  is  called  a  documentary  payment  bill.  The  major  portion  of 
English  international  banking  business  is  to  take  up  documentary 
drafts,  either  for  acceptance  on  a  commission  basis  or  for  collection. 

Clean  and  secured  bills  of  exchange. — Drafts  known  as  clean  bills, 
that  is,  those  without  documents  attached,  are  issued  usually  against 


84  Bank  and  Trade  Acceptances 

credit  balances  abroad.  Such  a  bill,  for  example,  is  the  bank's  own 
draft  drawn  on  any  one  of  its  foreign  correspondents.  Then  there  are 
so-called  secured  bills,  drawn  in  connection  with  the  sale  of  stocks 
and  bonds,  which  may  be  shipped  along  with  the  draft  or  forwarded 
under  separate  cover.  The  last  method  is  adopted,  however,  only 
when  the  credit  standing  of  the  drawee,  the  purchaser  and  the  secur- 
ities is  best  known. 

Finance  bills. — Frequently  interest  rates  are  lower  in  Europe  than 
they  are  in  the  United  States,  and  our  international  bankers  are  quick 
to  take  advantage  of  the  opportunity  for  profit,  which  may  be  gained 
by  borrowing  funds  there  to  be  loaned  out  here.  Suppose  the  rate  for 
money  in  New  York  is  quoted  at  five  per  cent.  In  London  at  that 
time  bills  of  exchange  may  be  discounted  at  three  per  cent.  Under 
such  circumstances,  the  New  York  banker  will  draw  a  bill  of  exchange 
for  so  many  pounds  sterling,  the  maturity  of  which  bill  is,  say,  sixty 
or  ninety  days,  upon  his  London  correspondent  who  agrees  to  accept 
the  bill  upon  presentation.  This  is  known  as  a  "finance  bill."  The 
New  York  banker  is  enabled  to  discount  this  bill  drawn  on  his  London 
correspondent,  in  New  York.  The  purchaser  of  the  bill  in  New  York 
would  invariably  have  it  discounted  in  London.  For  the  funds  to 
reach  London  before  maturity,  the  New  York  bank  would  have  to 
remit  to  his  London  "accepting"  correspondent,  a  demand  draft  in 
payment  of  the  finance  bill. 

Finance  bills  are  used  by  banks  very  frequently,  and  they  make  up 
a  large  amount  of  the  commercial  paper  offered  on  the  London  market. 
They  are  a  means  of  profit  to  the  banks,  which  can  secure  money  by 
the  discount  of  such  paper,  loaning  out  the  funds  so  acquired  at  a 
higher  rate  than  that  at  which  finance  bills  discount. 

Commercial  letters  of  credit. — Similar  to  the  methods  used,  though 
more  in  the  financing  of  American  trade  than  that  of  England,  is  the 
"commercial  letter  of  credit,"  which  is  an  authorization  to  the  shipper 
to  draw  on  the  bank,  up  to  a  stipulated  amount,  upon  terms  and  con- 
ditions clearly  expressed  in  such  letter  of  credit,  and  which  drafts  so 
drawn  the  bank  binds  itself  to  either  accept  or  to  pay  upon  presenta- 
tion. Here  too,  the  bank  is  provided  in  advance  with  funds  to  take  up 
the  draft  at  maturity.  For  this  service,  the  bank  charges  a  round 
commission. 


Commercial  Banking  and  Credits  85 

Advances  on  consignments. — English  banks,  as  we  have  seen,  make 
purchases  of  drafts  or  make  partial  or  total  advances.  They  also  make 
advances  on  consignments  of  merchandise.  Here,  the  signature  of  the 
drawer  of  the  draft  forms  one  part  of  the  security  and  the  goods  form 
the  other.  The  bank  may  turn  over  the  goods  to  the  firm,  retaining 
a  lien  on  such  goods  until  the  draft  is  paid,  such  lien  being  acknowl- 
edged in  a  "letter  of  hypothecation"  given  to  the  bank  by  the  accept- 
ors of  the  draft,  stating  that  "such  goods  in  the  meantime,  and  the 
proceeds  thereof,  to  be  held  by  the  firm  in  trust,  on  behalf  of  the 
bank,  for  the  payment  of  said  sum."  Clauses  as  to  insurance,  sale, 
etc.,  are  also  continued  in  letters  of  hypothecation  used  in  making 
advances  on  consignments. 

The  English  banks,  further,  protect  themselves  from  loss  in  the 
event  the  transaction  results  in  unprofitableness  to  the  parties  con- 
cerned. A  letter  "of  lien"  or  "of  trust"  provides  that  the  firm  "shall 
hold  the  said  goods  in  trust  on  behalf  of  the  bank,  and  have  them  duly 
stored,  insured  against  fire,  and  remit  the  proceeds  to  the  bank  as  and 
when  sold.  In  such  cases,  when  advancements  on  consignments  are 
made  by  English  banks,  they  may  protect  themselves  in  whatever 
way  and  by  whatever  means  they  think  best,  if  this  forms  a  part  of 
the  agreement  with,  and  is  acceptable  by  the  firm. 

The  London  Discount  Market 

In  no  city  in  the  world  has  the  business  of  discounting  bills  of 
exchange  and  acceptances  been  so  thoroughly  organized  as  in  London. 
The  business  of  discounting  is  regulated  chiefly  by  the  operations  in 
the  open  market  of  the  many  bankers  and  brokers,  and  what  is  more 
important,  of  established  companies  known  as  discount  houses,  es- 
pecially organized  for  the  purpose  of  buying  and  selling  bills.  Fur- 
thermore, through  the  operations  of  a  large  group  of  bill  brokers, 
corresponding  in  a  way  to  the  commercial  paper  broker  in  this 
country,  the  means  of  a  prompt  and  extended  distribution  of  commer- 
cial paper  is  provided. 

It  was  stated  by  a  Federal  Reserve  official  but  a  short  time  ago  that 
there  were  two  hundred  million  dollars  bankers'  acceptances  outstand- 
ing in  the  New  York  market,  whereas  there  were  more  than  two  bil- 
lion dollars  in  the  London  market,  without  considering  the  amount  of 
trade  acceptances  in  use. 


86  Bank  and  Trade  Acceptances 

What  comprises  the  great  London  money  and  discount  market. — 

The  banking  system  in  England,  and  that  which  comprises  the  Lon- 
don money  market,  consists  first  of  the  Bank  of  England,  followed 
by  nearly  one  hundred  joint  stock  banks,  the  latter  maintaining  more 
than  seventy-five  hundred  branches  and  employing  more  than  one 
billion  dollars  in  capital.  Their  resources  amount  to  more  than  seven 
billion  dollars  in  deposits  alone.  The  existence  of  half  a  hundred 
colonial  banks  having  resources  of  one  billion  dollars  available  for 
the  London  money  market,  branches  of  great  foreign  banks  with 
money  aplenty  to  use  for  loans  and  investments,  finance  houses  mak- 
ing a  specialty  of  accepting  bills  growing  out  of  imports  and  exports, 
brokers  of  commercial  paper,  investors,  such  as  insurance  companies, 
the  larger  commercial  firms,  private  bankers,  private  money  lenders, 
etc.,  all  compose  the  great  money  lending  interests  in  London  and 
make  up  what  is  better  known  as  the  London  money  market. 

Watchfulness  of  British  Banks 

British  banks  are  vigilant  of  the  discount  operations  carried  on  by 
each  firm.  Should  they  consider  that  the  public  is  overtrading,  they 
will  cease  buying  bills,  thus  checking  the  tendency  of  credit  over- 
expansion. 

The  Bank  of  England  is  not  ordinarily  obliged  to  continue  the  pur- 
chase of  all  kinds  of  bills  which  may  be  offered,  but  generally  does  pur- 
chase all  such  bills  which  conform  to  the  "requirements."  As  with 
the  Federal  Reserve  banks,  the  Bank  of  England  is  the  keeper  of  the 
nation's  reserves.  The  deposit  of  the  reserves  of  the  numerous  banks 
throughout  the  Empire  with  the  Bank  of  England  operates  in  the 
same  manner  in  which  the  member  banks  of  the  Federal  Reserve 
System  keep  their  reserve  deposits  with  their  reserve  banks.  Thus 
balances  under  the  English  banking  system  are  likewise  immediately 
convertible  into  cash,  either  by  withdrawals  or  by  rediscounts  of  paper 
with  the  Bank  of  England. 

Bank  of  England  discount  rate. — Of  great  influence  on  the  London 
money  markets  and  on  which  in  a  great  part  other  money  markets 
are  affected  to  a  considerable  degree  is  the  Bank  of  England  rate 
which  is  made  public  every  Thursday.  This  rate  moves  up  or 
down  primarily  in  accordance  with  the  law  of  supply  and  demand. 


Commercial  Banking  and  Credits  87 

If  the  demand  for  funds  is  heavy  and  the  supply  low,  the  bank 
increases  its  rate,  which  invariably  forces  borrowers  to  pay  ofif  their 
loans,  and  so  tends  to  stop  credit  overexpansion.  If,  on  the  other 
hand,  the  demands  are  light,  rates  are  lowered,  and  borrowing  is 
thereby  stimulated. 

THE  BANKING  AND  CREDIT  SYSTEM  OF  FRANCE 

The  Bank  of  France;  creation. — The  Bank  of  France,  the  organiza- 
tion of  which  dates  back  to  the  year  1800  is  the  central  financial  insti- 
tution of  the  country  and  the  head  of  the  banking  system.  It  was 
created  by  Napoleon  Bonaparte,  with  the  purpose  of  aiding  and  con- 
trolling the  Government  finances. 

Operation  of  the  Bank  of  France ;  reserves. — The  Bank  of  France 
operates  through  a  Governing  Board,  two  Deputy  Governors  being 
appointed  by  the  Federal  Government,  and  fifteen  Regents  being 
elected  by  the  shareholders.  The  facilities  of  the  Bank  of  France,  as 
those  of  England,  are  extended  by  means  of  branches,  both  main  and 
sub-branches,  with  numerous  agencies,  all  of  which  are  scattered 
throughout  the  country.  The  Bank  of  France  is  the  central  reserve 
holding  bank  of  the  nation  and  is  also  a  bank  for  bankers.  The  prin- 
ciples of  central  reserves  are  much  more  in  favor  of  the  Central  Bank 
and  its  branches  than  in  the  case  of  the  English  institutions.  The 
Bank  of  France  is  also  a  privately  owned  institution,  directly  super- 
vised by  the  Government,  and  is  the  only  note  issuing  bank  in  the 
country,  with  monopolistic  powers. 

Credit  societes;  their  operation. — Various  incorporated  societies 
known  as  "Credit  Societes"  are  in  existence.  These  exercise  the 
functions  of  a  modern  bank  in  every  particular.  It  is  said  that  in 
France  about  four  big  banks  control  the  major  portion  of  the  banking 
business  and  have  a  large  share  in  dictating  the  banking  policy  of  the 
country. 

In  France,  the  incorporated  banking  institutions,  otherwise  known 
as  "Credit  Societes"  are  engaged  in  the  business  of  receiving  deposits, 
making  discounts  and  loans,  in  syndicate  and  security  brokerage  oper- 
ations, and  in  foreign  exchange  business,  as  well.  In  this  connection, 
they  come  into  direct  conflict  with  the  various  banks  of  the  country, 


88  Bank  and  Trade  Acceptances 

which  has  more  than  once  brought  out  a  strong  complaint  from  the 
other  banking  institutions. 

Private  banks;  their  operations. — Private  bankers  exist  in  France 
as  in  England,  and  in  similar  numbers.    Their  business  comprises  deal- 
ings in  notes  of  the  Bank  of  France.    They  engage  also  in  the  business 
of  loaning  on  collateral,  in  discount  operations,  and  in  foreign  ex- 
change dealings. 

The  French  Credit  System 

Services  of  the  Bank  of  France. — The  services  of  the  Bank  of  France 
are  most  important  in  connection  with  the  discount  of  bills  of  ex- 
change, which  form  the  basis  of  the  French  discount  market.  Here, 
the  Bank  of  France  extends  a  most  liberal  policy.  As  in  the  system 
of  banking  in  the  United  States  under  the  Federal  Reserve,  and  as  in 
the  English  banking  system,  gold,  silver,  and  commercial  paper  form 
the  basis  of  the  note  issue  in  France.  We  have  related  how  the  Fed- 
eral Reserve  banks  may  rediscount  quantities  of  eligible  paper,  and 
thus  obtain  the  proceeds  in  Federal  Reserve  notes  as  a  basis  of  circu- 
lation of  credit.  In  France,  commercial  paper  of  a  certain  quality  is 
likewise  interchangeable  for  bank  notes. 

Credits  in  France;  classes  of  eligible  paper;  paper  discountable. — ■ 
With  the  exception  of  land  credits  and  of  cooperative  credits,  the 
French  credit  system  shows  little  specialization.  In  France,  paper 
brokers  exist  to  a  limited  extent,  their  operations  not  being  as  wide  as 
those  of  the  English  paper  brokers  and  discount  houses.  The  elas- 
ticity of  credit  in  France  is  also  not  as  broad  as  in  England. 

The  majority  of  paper  discounted  in  France  is  for  amounts  of  loo 
francs  or  less,  and  the  average  time  to  maturity  is  thirty  days.  In 
France,  eligible  paper  must  bear  three  names,  two  of  which  are  re- 
quired to  be  of  parties  domiciled  in  France  and  known  to  be  solvent. 
Two  name  bills  are  accepted  only  in  cases  where  they  are  accom- 
panied by  satisfactory  collateral,  and  where  both  parties  are  French. 
They  are  to  a  large  extent  the  paper  dealt  in  by  private  bankers,  who, 
by  adding  their  own  indorsement,  make  it  a  three  name  paper  eligible 
for  rediscount  with  the  Bank  of  France.  The  private  bankers  also 
make  a  practice  of  discounting  each  other's  acceptances,  the  usual 


Commercial  Banking  and  Credits  S9 

charges  for  such  acceptance  accommodation  being  one-quai-ter  of  one 
per  cent,  for  drafts  which  have  three  months  to  run,  and  sometimes 
going  lower  than  this  figure.  A  good  portion  of  the  bills  discounted 
arise  from  agricultural  as  well  as  from  commercial  transactions. 

The  Extensive  Use  of  Acceptances  Over  the  Open  Account 

Method  in  France 

Superiority  of  the  acceptance  and  bill  of  exchange. — As  in  England, 
the  open  account  is  replaced  by  the  bill  of  exchange  or  time  draft, 
and  to  a  large  measure,  in  the  three  name  paper  denominated  as 
"acceptances."  In  supporting  a  discount  market  as  exists  in  France, 
this  class  of  paper  bearing  three  names  is  of  very  great  importance. 
It  is  easily  discountable.  Compared  with  the  promissory  note,  the 
bill  of  exchange  is  far  superior  to  the  former.  First,  it  bears  behind 
it  the  responsibility  of  the  maker;  second,  of  the  acceptor;  and  third,  of 
a  specific  shipment  of  goods.  So  wide  is  the  use  of  these  credit  instru- 
ments abroad,  that  they  circulate  as  freely  as  does  a  check  in  America. 

It  is  this  system  of  credit,  namely,  the  bill  of  exchange,  the  accept- 
ance, the  check  and  bank  note,  which  gives  to  France  an  ideal  and 
highly  elastic  credit  system. 

THE  BANKING  AND  CREDIT  SYSTEM  OF  GERMANY 

The  German  Reichbank ;  its  operation. — The  principle  of  centralized 
banking  is  much  more  developed  in  the  case  of  Germany  than  in 
either  England  or  France.  The  Reichbank  operates  through  boards 
known  as  the  Cartorium,  Decktorium  and  the  Central  Auschuss, 
respectively.  A  much  more  closer  relation  with  the  Government 
exists  in  the  case  of  the  Reichbank  than  in  that  of  the  French  or 
English  institutions.  The  German  Government  exercises  a  much 
more  comprehensive  control  and  paternal  attitude  over  the  operations 
of  the  Reichbank  and  in  the  conduct  of  its  affairs,  than  in  the  English 
and  French  institutions. 

The  Cartorium ;  Decktorium  and  Central  Auschuss. — The  Cartorium 
consists  ot  a  Ijody  of  five,  who  are  the  head  supervisors.  They  are 
appointed  by  the  Government.  The  active  board  of  management  is 
the  Decktorium,  also  appointed  by  the  Government  for  a  period  of  life. 


go  Bank  and  Trade  Acceptances 

The  last  named  administrative  body  of  the  Reichbank  is  the  Central 
Auschuss,  which  is  a  sort  of  advisory  committee  to  the  stockholders. 
It  has  not  the  powers  delegated  to  it  which  the  other  two  adminis- 
trative bodies  possess,  though  it  exercises  considerable  influence  over 
the  bank's  business  affairs. 

Branch  banking  through  the  Reichbank ;  reserves. — The  branch  sys- 
tem of  banking  exists  in  Germany,  in  the  case  of  the  Reichbank,  which 
has  main  branches,  sub-branches  and  agencies  situated  throughout 
the  country.  The  controlling  factor  in  the  Reichbank's  operations  is 
the  central  bank,  which  governs  the  affairs  of  all  the  dependent  organ- 
izations. The  ownership  of  the  German  bank  is  private,  though  this 
is  declared  by  many  to  be  but  a  theory.  The  Reichbank  is  the  holder 
of  the  reserves  of  the  nation  and  is  the  only  note  issuing  bank  in  the 
country  with  practically  monopolistic  powers. 

Incorporated  banks. — In  Germany,  there  exist  also  several  hundred 
incorporated  banks,  though  no  more  than  half  a  dozen  actually  control 
the  situation,  the  latter  conducting  more  than  half  the  banking  busi- 
ness of  the  country.  In  the  majority  of  cases  the  smaller  banks  in 
Germany  are  dominated  by  the  big  metropolitan  institutions. 

Importance  of  the  Reichbank. — As  in  England,  the  Reichbank  de- 
cides the  discount  rate  and  the  rate  for  loans.  It  is  the  central  figure 
in  German  banking,  and,  all  other  institutions  in  the  country  being  in 
close  touch  with  it,  it  is  like  the  Federal  Reserve  bank,  a  "bank  for 
bankers."  It  is  a  private  institution,  and,  though  with  private  means, 
is  still  considered  to  be  under  the  control  of  the  Government.  The 
Reichbank  confines  its  business  particularly  to  the  discount  of  short 
term  bills  of  exchange,  especially  mercantile  bills.  It  does  not  engage 
in  the  discount  of  credit  and  finance  bills,  as  they  are  based  upon  a 
real  money  claim  and  are  to  a  certain  extent  security  in  themselves, 
being  secured  by  capital  already  employed. 

Long  term  credits;  their  benefits. — In  Germany  the  connection  be- 
tween industrial  enterprises  and  the  banks,  is  very  close,  this  fact 
distinguishing  it  from  the  banking  systems  of  other  countries.  The 
German  bank  is  attracted  by  long  term  credits,  which  is  quite  contrary 
when  compared  with  the  British  system.    In  foreign  trade,  these  long 


Commercial  Banking  and  Credits  91 

term  credits  have,  until  the  outbreak  of  the  Great  War,  been  a  direct 
means  of  bring-ing  home  to  Germany  large  volumes  of  foreign  busi- 
ness, and  it  is  by  these  long  term  extensions  of  credit  that  the  banking 
system  of  Germany  has  rendered  its  greatest  service. 

The  Use  of  Acceptances  in  Germany 

The  bank  and  trade  acceptance. — In  Germany,  the  bank  acceptance 
is  used  more  than  the  trade  acceptance,  as  merchants  prefer  to  draw- 
on  the  bank  of  the  buyer  for  acceptance  or  for  payment  rather  than 
to  have  the  buyer's  acceptance. 

Relation  of  German  banking  to  industry;  credits. — In  the  acceptance 
of  a  bill,  the  individual  credit  standing  of  the  firm  is  more  a  factor 
with  the  banks  than  anything  else.  The  German  banks  participate  to 
a  large  extent  in  the  industrial  enterprises  of  the  country,  and  are  rep- 
resented on  the  boards  of  directors  of  numerous  such  enterprises. 
This  enables  the  banks  to  know  better  the  firms  with  which  they  are 
dealing.  They  are  inclined  to  give  special  support  to  their  financial 
and  credit  problems. 

The  bank  acceptance;  how  created. — The  bank  acceptance  arises  in 
the  following  way:  The  seller,  having  shipped  goods  to  the  buyer  will 
draw  on  the  bank  of  the  buyer,  by  arrangement,  for  the  same.  The 
bank  accepts  such  bill  and  sells  the  same  to  other  bankers  or  in  the 
open  market.  In  selling  a  bill  of  goods,  the  merchant  or  manufacturer 
will  arrange  with  his  brokers  to  draw  on  the  latter  for  the  amount, 
thus  anticipating  payment  for  the  goods.  When  so  accepted,  the  bill 
is  sold  to  other  bankers  or  in  the  open  market,  and  after  indorsement, 
it  becomes  prime  paper  eligible  for  rediscount  at  the  Reichbank. 
These  acceptances  constitute  eighty  per  cent,  of  the  paper  held  by 
banks.  They  are  readily  discountable  in  the  discount  market.  The 
system  of  contraction  and  expansion  in  Germany  is  similar  to  that  of 
England,  where,  if  there  is  an  over  extension  of  credit,  the  market 
reacts,  and  vice  versa. 

Method  of  Financing  German  Trade 

The  German  export  merchant,  in  financing  his  foreign  trade,  selling 
on  term  credits,  say,  six  months  to  maturity,  and  desiring  to  have 


92 


Bank  and  Trade  Acceptances 


funds  made  available  to  him  immediately,  so  as  not  to  tie  up  his  cap- 
ital, in  expectation  of  payments  by  the  buyers  at  maturity,  does  not 
draw  on  the  oversea's  buyer,  for  this  would  be  contrary  to  the  terms 
of  sale,  and  the  draft  would  undoubtedly  not  be  accepted.  The  seller, 
therefore,  arranges  with  his  banker  to  accept  a  draft  drawn  on  the 
strength  of  the  sale.  The  banker  would  then  accept  this  draft,  usually 
drawn  for  half  the  time,  say  three  months,  with  option  of  renewal. 
The  paper  then  becomes  eligible  for  rediscount  with  the  central  bank. 
Imports  are  financed  by  the  German  banks  in  practically  the  same  way 
as  by  the  English  institution. 


PART  II 

ACCEPTANCES 

Their  Importance  in  the  Fields  of  Domestic  and  International  Trade 

and  Commerce,  and  as  a  means  of  Creating  Better  Business  and 

Credit  Methods  for  the  Country. 


An  Extended  Survey  of  the  Acceptance,   Its  Merits  and  Demerits, 

Practical  Uses ;  Benefits  to  the  Business  Community,  the  Business 

Man,  the  Banker,  the  Investor,  and  the  Country. 


Forms,  Plans,  Methods  of  Handling  Acceptances,  Ways  and  Means  Used 

to  Encourage  Their  Use,  a  Concensus  of  Opinion  by  the  Leading 

Associations  and  Organizations. 


CHAPTER  V 

INTRODUCTORY 

Historical  Aspect  of  the  Acceptance — Its  Use  in  Europe  and  in 

THE  United  States 

The  Great  War  has  indeed  worked  wonders  in  revolutionizing 
previous  methods  and  customs  adhered  to  by  the  people  of  this  coun- 
try for  long  periods  of  time,  and  has  forced  developments  here  and 
there,  which  otherwise  would  have  been  years  in  getting  a  national 
hearing.  This  is  no  less  true  of  the  trade  acceptance,  which,  as  a  re- 
sult of  the  war,  has  had  its  reintroduction  into  the  system  of  American 
credit  and  finance. 

With  the  exception  of  the  natural  leaders  in  advanced  commercial 
and  financial  methods,  measures  appealing  to  the  thrift  of  the  general 
business  man  have  been  without  favoritism,  and,  were  it  not  through 
the  efforts  of  the  former,  whose  wide  experience  and  knowledge  lead 
them  to  the  adoption  of  the  most  improved  methods  of  business,  the 
rapid  progress  which  has  already  been  made  in  this  particular  field, 
would  as  yet  have  had  to  be  an  expectation  rather  than  a  materializa- 
tion. 

American  merchants  and  business  men  have  hitherto  adhered  to 
such  great  extent  and  have  become  so  accustomed  to  the  practice  of 
conducting  their  business  by  means  of  the  "open  book  account  meth- 
od," or,  the  more  favorite  term  used  in  comparison  with  the  trade  ac- 
ceptance method,  "on  account,"  in  spite  of  its  cumbersome,  uneconom- 
ical and  inelastic  ways,  that  efforts  looking  forward  to  the  substitution 
of  better  credit  methods  have  been  looked  upon  with  suspicion. 

Unlike  the  American,  the  European  nations  have  built  up  so  strong 
an  acceptance  business  that  this  method  is  used  by  them  as  freely  as 
we  here  use  the  open  account  or  bank  check. 

Yet  this  great  differentiation  in  commercial  methods  between  the 
merchants  of  Europe  and  those  of  this  country  has  not  until  a  short 
while  ago  influenced  the  latter  to  adopt  this  better  and  more  economi- 
cal form  of  credit  instrument.  Their  answers  to  the  arguments  in  ex- 
position of  the  trade  acceptance  have  been  that  the  open  account  sys- 
tem is  good  enough  for  the  present. 

95 


g6  Bank  and  Trade  Acceptances 

Many  ot  us  remember  how,  when  the  automobile  first  appeared  in 
this  country,  the  wisest  men  would  walk  the  streets  and  characterize 
the  users  of  it  as  ridiculous.  But  it  is  doubtful  whether  these  dis- 
claimants  of  the  automobile  would  make  the  same  statement  today. 

It  is  an  established  fact  that  this  country  has  been  most  ready  to 
adopt  in  the  field  of  specialization,  methods  which  have  proved  them- 
selves to  be  far  in  advance  of  those  heretofore  existing.  In  this  re- 
spect, the  American  has  by  far  outstripped  the  European. 

It  is  with  this  idea  in  view,  that  the  present  work  on  acceptances  has 
been  prepared ; — not  for  those  who  will  not  learn ;  but  for  those,  who, 
when  they  discover  an  improved  method,  do  not  hesitate  to  adapt  it 
to  their  needs. 

It  is  estimated  that  the  annual  turnover  in  the  trade  and  commerce 
of  this  country  with  present  day  prices  amounts  to  more  than  sixty 
billions  of  dollars.  Can  we,  therefore,  overlook  a  saving,  no  matter 
how  small  a  percentage,  on  this  huge  sum,  in  recording,  in  account- 
keeping,  in  expenses  incident  to  the  conduct  of  business,  in  interests, 
discounts,  bad  debts,  illiquidity  and  unproductiveness  of  this  huge 
sum  of  money. 

THE  ACCEPTANCE;  ITS  USE  AND  IMPORTANCE  IN  THE 
CREDIT  SYSTEMS  OF  EUROPE. 

The  one  great  feature  which  distinguishes  the  credit  systems  of  Eu- 
rope and  of  America  lies  in  the  mode  of  financing  the  trade  of  the  rel- 
ative countries.  In  England,  France  and  Germany,  as  well  as  the  other 
countries  of  Europe,  the  acceptance  circulates  as  freely  as  does  cur- 
rency in  the  form  of  bills  and  specie,  and  the  check  in  America.  In 
the  European  countries,  the  acceptance  and  its  uses  are  so  very  greatly 
developed  that  bills  in  amounts  as  low  as  one  dollar  are  in  existence. 
For  instance,  in  France,  one-half  of  such  commercial  paper  is  in 
amounts  of  $20  or  less,  and  the  average  bill  is  between  $20  and  $100. 
On  the  whole,  it  is  not  an  easy  matter  to  find  an  acceptance  exceeding 
$5,000  in  amount. 

THE  ACCEPTANCE  MARKET  IN   EUROPE  AND   THE  AC- 
CEPTANCE AS  A  CIRCULATING  MEDIUM  RESEMBLING 

THE  USE  OF  CURRENCY. 

To  arrive  at  the  importance  of  the  acceptance  in  Europe,  it  is  a  com- 
mon fact  that  this  class  of  paper  is  used  just  as  freely  as  the  bank 
check  in  this  country.     In  the  European  countries,  trade  acceptances 


Commercial  Banking  and  Credits  97 

are  taken  and  held  by  large  and  small  business  men  until  maturity,  or 
passed  out  by  them  according  to  their  requirements  in  connection  with 
the  financing  of  their  business.  In  this  way,  the  merchants  have 
an  opportunity  to  carry  the  account  for  as  long  a  time  as  they  wish, 
and  when  circumstances  warrant,  to  pass  these  acceptances  along  to 
the  proper  channels  and  so  obtain  the  necessary  funds  with  which  to 
continue  the  financing  of  their  business.  In  this  connection  the  accept- 
ance, because  of  its  good  utility,  supersedes  the  check. 

While  it  is  true  that  the  highly  developed  acceptance  markets  of 
Europe  have  rarely  afiforded  any  too  high  a  rate  of  discount,  in  com- 
parison with  the  much  higher  rates  in  this  country,  still  the  merchants 
of  Europe  have  considered  this  as  a  principle  of  thrift  not  to  be  disre- 
garded. 

THE  ACCEPTANCE  AND  ITS  USES  IN  THE  UNITED  STATES 

BEFORE  THE  CIVIL  WAR. 

The  use  of  the  acceptance  in  America  dates  back  to  the  time  when 
England  sent  goods  to  Virginia  and  the  boat  took  back  tobacco.  The 
manner  in  which  an  acceptance  was  then  created  was  by  the  buyer 
writing  the  word  "accepted"  on  the  bill  for  the  English  goods,  which 
was  paid  from  the  proceeds  of  the  return  cargo  of  tobacco,  and,  vice- 
versa.  The  use  of  the  acceptance  was  continued  by  the  Southern 
planters  of  cotton  and  tobacco  in  the  United  States  practically  up  to 
the  time  of  the  Civil  War.  Following  that  period,  at  least  two  causes 
contributed  to  its  discontinuance  to  a  large  extent,  the  first  being  the 
passing  out  of  existence  of  the  bank  of  the  United  States,  and  the  sec- 
ond and  contributing  factor,  being  the  dislocation  of  credits  during 
the  war  and  the  desire  on  the  part  of  the  populace  to  supply  itself 
with  hard  money,  to  the  detriment  of  commercial  paper  values. 

The  National  Bank  Act  passed  during  the  Civil  War  created  a 
stable  currency  based  on  the  credit  of  the  Government  by  means  of 
bond  issues  and  gold  reserves.  This  system  of  credit,  though  it  had  a 
very  sound  foundation,  was  yet  a  very  inelastic  one,  for  it  had  its  lim- 
itations. The  government  was  able  to  extend  its  credit  only  on  the 
security  which  it  possessed,  but  further  than  this  it  could  not  go.  It 
was  not  empowered  to  create  its  own  credit  instruments  in  the  form  of 
notes  based  upon  commercial  paper  as  security,  for  there  was  no 
standardization  of  commercial  paper.  Above  all,  the  most  serious 
handicap  to  the  creation  and  development  of  standard  commercial  pa- 


98  Bank  and  Trade  Acceptances 

per  was  the  fact  that  the  prejudice  of  the  banks  of  the  country  against 
a  central  banking  system  greatly  hindered  the  establishment  of  redis- 
count facilities  or  open  markets  for  the  absorption  of  commercial  pa- 
per. On  the  other  hand,  the  disruption  in  credits  following  the  Civil 
War  had  no  effect  upon  the  continuance  of  the  use  of  one  name  paper, 
which  system  endures  to  this  day  in  the  United  States.  A  great  por- 
tion of  the  commercial  transactions  of  the  country  were  based  upon 
cash  payments,  carrying  with  them  discount  privileges  which  gave  to 
the  users  of  this  plan  a  high  credit  standing. 

COMPARISON  OF  EUROPEAN  AND  AMERICAN  METHODS 

OF  COMMERCIAL  CREDIT. 

In  the  European  system  of  credit,  the  acceptance  is  the  most  import- 
ant of  all  forms  of  commercial  paper,  being  used  as  extensively  as  is 
the  check  and  banic  note  in  this  country.  In  other  words,  the  accept- 
ance in  those  countries  is  used  in  nearly  all  cases  requiring  the  exten- 
sion of  credit. 

In  America,  where  the  cash  discount  system  is  not  employed,  single 
name  paper  prevails.  Paper  of  this  sort  is  created  by  the  seller  giving 
his  own  promissory  notes.  The  seller  is,  however,  limited  in  borrowing 
on  his  own  promissory  notes  in  proportion  to  his  credit  standing. 

The  central  banking  institutions  of  Europe  do  not  discount  any 
commercial  paper  bearing  less  than  two  names,  and  the  Bank  of 
France  requires  as  a  rule  three  names  to  carry  the  privilege  of  redis- 
count. 

Prior  to  the  adoption  of  the  Federal  Reserve  System  the  commer- 
cial banks  of  this  country  handled  practically  all  of  the  commercial 
paper  produced,  originating  from  various  means.  The  banks  would 
discount  such  commercial  paper,  the  majority  of  which  was  of  a  single 
name  nature.  Distribution  of  commercial  paper  before  the  passage  of 
the  Act  was  on  a  limited  scale.  The  commercial  paper  broker  was  the 
intermediary  between  firm  and  banks  and  brought  them  together. 
Banks  would  discount  the  paper  of  their  customers  and  would  then 
keep  it  or  dispose  of  it  through  paper  brokers  to  banks  and  investors. 

The  fundamental  difference  in  the  two  systems  up  to  the  passage  of 
the  Federal  Reserve  Act  may,  therefore,  be  seen.  However,  with  the 
adoption  of  the  new  banking  system  in  this  country,  a  great  change  in 
credit  procedure  was  brought  about. 


Commercial  Banking  and  Credits  99 

THE  INTRODUCTION   OF  THE   FEDERAL  RESERVE  ACT 
AND  ITS  RELATION  TO  THE  ACCEPTANCE;  ITS  RE-ES- 
TABLISHMENT THE  RESULT. 

With  the  passage  of  the  Federal  Reserve  Act,  the  re-establishment 
of  an  unlimited  field  for  rediscount  of  domestic  trade  acceptances  was 
created  by  the  Federal  Reserve  Board.  In  a  circular  of  the  Board 
dated  July  loth,  "trade  acceptances"  were  made  a  distinct  class  of 
commercial  paper,  being  raised  to  a  level  of  great  importance,  and  to- 
gether with  the  newly  created  "bank  acceptance"  were  made  the  basis 
of  the  American  discount  market.  To  encourage  their  introduction 
and  use,  the  Board  also  approved  the  establishment  of  preferential  dis- 
count rates.    This  ruling  of  the  Board  follows : 

Bills  of  Exchange  Drawn  Against  Sales  of 
Goods  and  Accepted  by  Purchasers  Here- 
inafter  Referred  to   as   "Trade   Ac- 
ceptances." 

By  regulation  B,  series  of  1916,  the  Board  has 
prescribed  the  conditions  upon  which  commer- 
cial paper  may  be  rediscounted  with  Federal 
Reserve  Banks,  and,  by  regulation  J,  series  of 
1915,  rules  have  been  promulgated  covering  op- 
erations in  bankers'  acceptances.  The  attached 
regulation  is  to  deal  with  trade  acceptances  as  a 
distinct  class  of  commercial  paper  for  which  the 
Board  is  ready  to  approve  the  establishment  of  a 
discount  rate  somewhat  lower  than  that  ap- 
plicable to  other  commercial  paper.  These  trade 
acceptances  are  more  particularly  defined  in  the 
appended  regulation  P,  series  of  1915,  and  in 
promulgating  it,  the  Board  expresses  the  belief 
that  it  will  considerably  enlarge  the  scope  of 
service  of  Federal  Reserve  Banks,  and  incident- 
ally assist  in  developing  a  class  of  "double  name 
paper"  which  has  shown  itself  in  so  many  coun- 
tries a  desirable  form  of  investment  and  an  im- 
portant factor  in  modern  commercial  banking 
systems. 


lOO  Bank  and  Trade  Acceptances 

Regulation  P,  above  referred  to,  in  series  of 
1915,  here  follows : 

Bills  of  Exchange  Drawn  Against  Sales  of 
Goods  and  Accepted  by  Purchasers  Here- 
inafter  Referred  to   as   "Trade   Ac- 
ceptances." 

I 

Definition 

In  this  regulation,  the  term  "trade  acceptance" 
is  defined  as  a  bill  of  exchange  of  the  character 
hereinafter  described,  drawn  to  order,  having  a 
definite  maturity  and  payable  in  dollars  in  the 
United  States,  the  obligation  to  pay  which  has 
been  accepted  by  an  acknowledgment,  written 
or  stamped,  and  signed  across  the  face  of  the 
instrument  by  the  company,  firm  or  corpora- 
tion, or  person  upon  whom  it  is  drawn ;  such 
agreement  to  be  to  the  effect  that  the  acceptor 
will  pay  at  maturity  according  to  its  tenor,  such 
draft  or  bill  without  qualifying  conditions. 

II 

Character  of  Paper  Eligible 

A  trade  acceptance,  to  be  eligible  for  redis- 
count, under  Section  13,  with  a  Federal  Reserve 
Bank  at  the  rate  to  be  established  for  trade  ac- 
ceptances, 

(a)  must  be  indorsed  by  a  member  bank,  ac- 
companied by  waiver  of  demand,  notice 
and  protest, 

(b)  must  have  a  maturity  at  the  time  of  dis- 
count of  not  more  than  ninety  days, 

(c)  must  be  accepted  by  the  purchaser  of 
goods  sold  to  him  by  the  drawer  of  the 
bill  and  the  bill  must  have  been  drawn 
against  an  indebtedness  expressly  incur- 
red by  the  acceptor  in  the  purchase  of 
such  goods. 


Commercial  Banking  and  Credits  ioi 

III 

Method  of  Certifying  Eligibility 

A  trade  acceptance  must  bear  on  its  face,  or 
be  accompanied  by  evidence  in  form  satisfactory 
to  the  Federal  Reserve  Bank,  that  it  is  drawn  by 
the  seller  of  goods  on  the  purchaser  of  such 
goods.  Such  evidence  may  consist  of  a  certificate 
on  or  accompanying  the  acceptance,  to  the  fol- 
lowing effect:  "The  obligation  of  the  acceptor 
of  this  bill  arises  out  of  a  purchase  of  goods  from 
the  drawer."  Such  certificate  may  be  accepted 
by  the  Federal  Reserve  Bank  as  sufficient  evi- 
dence ;  provided,  however,  that  the  Federal  Re- 
serve Bank,  in  its  discretion  may  inquire  into  the 
exact  nature  of  the  transaction  underlying  the 
acceptance." 

From  this  circular,  it  will  be  noted  that  the  Federal  Reserve  Board 
recognizes  trade  acceptances  as  comprising  a  distinct  class  of  com- 
mercial paper  and  subject  to  rediscount  at  rates  somewhat  lower  (us- 
ually one-quarter  to  one-half  of  one  percent.)  than  that  applicable  to 
other  commercial  paper.  The  Federal  Reserve  Board  also  especially 
commends  this  paper  as  a  class  of  double  name  paper,  which  has 
shown  itself  in  so  many  countries  a  desirable  form  of  investment  and 
an  important  factor  of  modern  commercial  systems. 

The  recommendation  of  the  Federal  Reserve  Board  to  the  effect  that 
acceptances  are  a  high  grade  commercial  paper,  commends  this  form 
of  credit  to  the  study  and  use  of  the  merchants  and  manufacturers  of 
the  United  States  of  America. 

From  the  foregoing,  we  may,  therefore,  define  the  term  "trade  ac- 
ceptance" as  follows : 

"A  bill  of  exchange,  drawn  to  order,  having  a  definite  maturity, 
and  payable  in  dollars  in  the  United  States,  the  obligation  to  pay 
which  has  been  accepted  by  an  acknowledgment,  written  or 
stamped,  and  signed,  across  the  face  of  the  instrument,  by  the 
company,  firm,  corporation  or  person,  upon  whom  it  is  dra\vn; 
such  agreement  to  be  to  the  effect  that  the  acceptor  will  pay  at 
maturity  according  to  its  tenor,  such  l^iil  without  qualifying  con- 
ditions." 


102  Bank  and  Trade  Acceptances 

Or,  in  other  words,  a  trade  acceptance  is  an  order  to  pay,  drawn  by 
the  seller  and  accepted  by  the  buyer,  and  represents  transactions  in 
merchandise  only,  as  stated  on  its  face.  They  are  time  bills  of  ex- 
change and  serve  the  same  purpose  as  a  transfer  of  gold  itself  in  the 
cancellation  of  debts,  and  are  regarded  by  economists  as  a  special  sort 
of  currency. 

Trade  acceptances  are  in  fact  two  name  paper  and  have  behind  them 
not  only  the  names  of  the  acceptor  and  the  drawer,  but  the  additional 
advantage  of  representing  actual  transactions  in  commodities. 

Trade  acceptances  are  eligible  for  rediscount  by  member  banks  with 
Federal  Reserve  Banks  up  to  fifty  percent,  and  where  authorized  by 
the  Federal  Reserve  Board,  up  to  one  hundred  percent  of  the  capital 
and  surplus,  which  again  shows  the  high  esteem  in  which  they  are 
held  under  the  law. 

The  general  use  of  acceptances  is  strongly  encouraged  by  the  Fed- 
eral Reserve  Board  and  by  the  various  Federal  Reserve  Banks  to  the 
end  that  they  may  be  used  freely  by  member  banks  and  depositors 
therein.  The  Board  has  shown  no  hesitancy  at  any  time  to  do  its  full 
share  towards  developing  the  acceptance  method  in  this  country,  and 
has  given  the  most  careful  attention  to  its  development  as  evidence 
of  its  practicability. 


CHAPTER  VI 
THE  AMERICAN  CREDIT  SYSTEM 

An  Analysis  of  the  Modes  of  Transacting  Business,  and  the  Merits 

OF  Each  System 

The  use  of  bills  of  exchange  in  the  United  States  dates  back  to  colonial 
times.  They  were  devices  employed  by  the  States  to  be  used  in  lieu  of 
metallic  money.  A  comparatively  small  proportion  of  them  arose  from 
commercial  transactions  and  for  this  reason  it  could  not  be  said  that  they 
were  "trade  bills."  From  the  beginning  of  the  nineteenth  century  up  to 
the  Civil  War  period,  there  was  a  steady  increase  in  the  proportion  of  this 
country's  business  done  through  the  medium  of  bills  drawn  by  the  seller 
of  goods  on  the  buyer.  It  was  during  this  time  that  the  so-called  "ac- 
ceptance" played  a  prominent  part  in  the  commercial  affairs  of  the  country 
and  stood  relatively  high  as  a  class  of  commercial  paper.  The  use  of 
these  "acceptances"  during  this  period  was  as  extensive  in  this  country  as 
it  was  in  England  then. 

The  Civil  War,  however,  ushered  in  new  conditions  which  demoralized 
commercial  paper  values  and  created  a  desire  on  the  part  of  the  business 
men  throughout  the  country  to  acquire  cash  in  preference  to  other  assets. 
Out  of  this  grew  the  pecuniary  American  system  of  cash  discounts. 

CASH  DISCOUNTS  AND  CASH  SETTLEMENT  OF  BILLS 

Following  the  Civil  War,  credits  in  the  United  States  were  of  an  un- 
certain kind.  Interest  rates  rose  high  and  merchants  on  the  whole  pre- 
ferred to  do  business  on  a  cash  basis.  The  cash  discount  became  the  cus- 
tomary inducement  for  the  settlement  of  bills,  and  varied  as  it  does  now, 
but  within  wider  limits,  according  to  whether  payment  was  spot  cash  or 
on  the  basis  of  ten  or  thirty  days'  time.  On  account  of  high  interest  rates, 
merchants  were  obliged  to  offer  larger  cash  discounts  as  an  inducement 
to  buyers  to  borrow  funds  and  use  them  for  the  prompt  settlement  of  their 
commercial  debts.  The  seller  in  this  way  relieved  himself  of  all  responsi- 
bility attendant  upon  the  carrying  of  the  buyer's  account,  and  of  financing 

103 


104  Bank  and  Trade  Acceptances 

the  latter's  business.  On  the  other  hand,  a  buyer,  who  was  not  able  to 
avail  himself  of  the  cash  discount  offered  him,  created  the  impression 
in  the  business  community  of  not  being  in  a  position  to  borrow  the  money 
that  he  required  for  the  purpose  of  discounting  these  obligations,  which 
fact  cast  a  certain  discredit  upon  him.  Subsequently,  interest  rates  de- 
clined again  in  many  lines  of  trade,  and  as  a  consequence,  cash  discounts 
grew  less  in  favor  until  they  reached  a  level  with  that  of  bank  discount 
rates. 

THE  CASH  DISCOUNT  SYSTEM  AND  ITS  DRAWBACKS 

From  this  system  of  cash  discounts,  arose  a  custom  widely  indulged 
in  by  buyers,  who,  preferring  not  to  take  advantage  of  the  discount  period 
offered  them  by  sellers,  deduct  their  discount  in  any  event,  notwithstand- 
ing the  fact  that  they  overran  the  period  of  credit  granted  them.  On 
account  of  close  competition  in  trade,  sellers  are  often  inclined  to  permit 
this  practice,  thus  allowing  the  buyer  to  gain  an  unfair  advantage  over 
them. 

The  consequence  of  a  system  as  above  described  tends  to  increase  prices 
inasmuch  as  it  is  then  necessary  for  the  seller  to  figure  the  selling  price 
high  enough  to  cover  the  loss  arising  from  this  improper  deduction. 
Again,  from  an  apparent  advantage  to  the  buyer,  there  arises  a  disad- 
vantage, for  he  still  believes  that  he  is  obtaining  a  large  discount  and  so 
discounts  his  obligation,  not  figuring  that  the  process  renders  it  alto- 
gether more  costly  to  him  on  account  of  the  increased  price  of  mer- 
chandise. 

Another  inconvenience  arising  from  the  cash  discount  system  is  that 
many  buyers  are  unable  to  acquire  cash  on  the  moment  to  take  advantage 
of  discount  opportunities  and  to  make  separate  loans  for  the  purpose  of 
discounting  each  bill  as  it  comes  in.  The  cost  of  the  merchandise,  there- 
fore, to  the  smaller  buyer  is  much  more  than  to  the  one  who  is  able  to 
take  advantage  of  the  cash  discount.  The  smaller  buyer,  therefore,  must 
seek  higher  prices  for  his  goods,  making  the  process  of  selling  for  him 
much  more  difficult,  which  deprives  him  of  the  fullest  benefits. 

THE  OPEN  ACCOUNT  SYSTEM 

Another  way  in  which  American  trade  is  generally  carried  on,  and 
upon  which  basis  most  transactions  are  effected,  is  by  the  open  account 
system,  whereby  the  seller  enters  upon  his  books  a  "debit"  against  the 


Commercial  Banking  and  Credits  105 

account  of  the  buyer,  which  represents  a  sum  owing  to  the  seller.  This 
system  is  generally  most  availed  of  in  credit  transactions.  Open  accounts 
are  usually  known  as  "book  accounts"  and  act  as  substitutes  for  promis- 
sory notes  and  cash  discounts.  Under  this  system,  the  chief  evidence  of 
the  indebtedness  of  the  buyer  to  the  seller  is  the  record  on  the  seller's 
books. 

The  open  account  system  holds  out  many  disadvantages.  Suppose  a 
seller  has  a  need  for  money  but  has  not  his  customers'  notes  to  discount  at 
his  bank.  He  is  able  to  procure  a  loan  only  upon  the  discount  of  his  own 
paper,  that  is,  by  giving  his  own  notes,  secured  by  his  open  book  account. 
Another  way  of  realizing  on  book  accounts  has  been  to  sell  or  assign  them 
outright  to  a  bank  or  commission  house,  which  assumes  all  risks  and 
charges  a  high  rate  of  interest,  and  perhaps  a  bonus  in  addition.  The 
assignor  receives  only  a  limited  amount  on  his  book  accounts,  the  assignee 
permitting  the  former  to  collect  the  accounts  when  due,  but  requires  the 
substitution  of  other  accounts  to  maintain  the  agreed  upon  ratio.  In  this 
way,  the  borrower's  credit  may  suffer  somewhat,  due  to  the  fact  that  his 
customers  may  learn  that  he  has  assigned  their  accounts  to  obtain  funds. 

The  evils  attending  the  open  book  account  method  are  many  and  serious. 
It  permits  the  buyer  to  hold  off  payment  past  the  date  of  maturity.  It 
results  in  a  loss  of  interest  charges  to  the  seller.  It  limits  the  activities  of 
the  seller  in  that  he  must  wait  until  he  realizes  upon  his  accounts.  The 
seller,  as  a  result,  must  borrow  on  his  available  assets,  and,  in  whatever 
form,  if  his  credit  is  not  so  high  as  to  acquire  for  him  a  moderate  loaning 
rate,  on  his  own  note,  he  is  forced  to  sacrifice  more  than  is  necessary  if 
he  must  assign  or  borrow  on  his  book  accounts. 

The  system  of  open  accounts  is  attended  by  numerous  other  abuses  and 
unfair  practices.  It  results  in  slow  collections,  bad  debts,  and  unnecessary 
losses.  Another  very  serious  evil  in  the  open  book  account  method  is  that 
the  only  evidence  the  seller  has  of  a  debt  owing  to  him  is  the  entry  upon 
his  books,  which  must  be  proven  to  the  satisfaction  of  those  in  authority. 
Furthermore,  when  the  time  comes  for  settlement,  the  buyer  may  always 
produce  arguments  whereby  deductions  are  forced  to  be  given  for  un- 
reasonable and  unfair  claims,  shortages,  and  losses  that  are  questionable, 
short  weights,  trade  discounts,  and  various  other  objectionable  methods. 

SINGLE  NAME  PAPER 

It  has  become  customary  in  recent  years  for  merchants,  who  have  ac- 
quired a  good  credit  standing,  to  sell  their  promissory  notes  to  the  public 


io6  Bank  and  Trade  Acceptances 

through  brokers  in  commercial  paper.  These  are  largely  purchased 
through  commercial  paper  dealers  by  the  banks  who  ultimately  distribute 
them  among  investors  for  the  employment  of  the  latter's  funds.  A  con- 
siderable proportion  of  these  notes  is  single  name  paper,  which  is  sold  upon 
the  credit  standing  of  the  maker.  The  only  responsibility  assumed  by  the 
broker  is  for  the  genuineness  of  the  signature.  When  money  is  easy,  there 
is  a  wide  market  for  this  class  of  commercial  paper,  but  its  buyers  must 
depend  entirely  upon  such  credit  information  as  they  can  obtain  regard- 
ing its  intrinsic  value.  Single  name  paper  is  bought  and, sold  on  faith 
alone.  The  merchant  financing  himself  through  the  discounting  of  his 
own  promissory  notes  is  required  to  file  a  statement  of  his  financial  con- 
dition periodically.  The  process  of  discounting  single  name  paper  is  often 
carried  to  great  abuse,  for  it  is  an  uncertain  matter  as  to  the  amount  of 
such  paper  Vv-hich  a  maker  may  have  outstanding  at  a  given  time.  There 
is  further,  no  indication  as  to  the  occasion  of  its  origin. 

SINGLE  NAME  PAPER  PREDOMINATES 

Of  the  classes  of  commercial  paper  in  use  at  the  present  time  in  the 
United  States,  single  name  paper  predominates.  It  is  estimated  by  well 
informed  commercial  paper  brokers  that  fully  ninety  percent  of  the  paper 
traded  in  is  of  the  single  name  class.  At  the  passage  of  the  Federal  Re- 
serve Act,  trading  in  paper  of  this  nature  was  the  nearest  approach  to  a 
discount  market  here. 

Included  in  the  class  of  promissory  notes  is  such  commercial  paper  as 
is  given  by  buyers  to  sellers  or  by  debtors  to  creditors.  The  purpose  of 
their  origin  here  may  also  not  be  known.  The  credit  of  the  buyer  is  not  of 
so  great  concern  to  the  bank  which  is  offered  the  paper  for  discount,  but 
the  credit  of  the  seller  is  looked  upon  as  the  main  security. 

The  one  serious  objection  to  the  single  name  paper  method  of  financing, 
is  that  it  is  not  known  why  the  paper  is  in  existence.  It  may  have  been 
given  in  settlement  of  a  past  due  obligation.  It  may  have  been  used  for 
purposes  other  than  those  involving  the  sale  of  merchandise,  and  it  may 
have  been  given  for  services. 

The  disadvantages  and  abuses  arising  out  of  the  open  book  account 
method  have  long  been  realized  by  the  commercial  and  credit  world. 

What  was  sought  by  the  business  men  and  bankers  was  the  adoption 
and  standardization  of  some  form  of  commercial  paper  which  would 
eliminate  most  of  the  disadvantages  of  the  open  book  account  method — 
something  that  would  stabilize  and  liquidate  commercial  credit  by  convert- 


Commercial  Banking  and  Credits 


107 


ing  the  sale  of  merchandise  into  a  liquidated  credit,  immediately  available 
at  reasonable  interest  rates  to  meet  the  financial  needs  of  the  business 
world. 

Recently,  there  has  set  in  a  movement  for  the  substitution  of  the  "trade 
acceptance"  in  place  of  the  open  account. 


CHAPTER  VII 

Procedure  in  the  Use  of  Acceptances 

Nothing  strange  in  acceptance  method. — There  is  nothing  strange 
in  the  acceptance  method — nothing  in  any  way  that  differs  from  usual 
business  customs.  The  users  of  the  acceptance  method  forfeit  no 
rights  which  they  otherwise  have  under  the  open  account  system.  It 
is  not  intended  to  supersede  all  other  existing  methods  of  transacting 
business.  It  is  simply  a  system  designed  to  create  better  credit  con- 
ditions and  sounder  business  methods. 

Acceptance  a  class  of  standardized  commercial  paper. — In  the  pre- 
ceding chapter,  there  was  explained  the  use  of  the  acceptance  in  this 
country  up  to  the  Civil  War  period,  and  the  causes  which  contributed 
to  its  decline.  Though  used  in  a  small  way  following  the  Civil  War 
up  to  a  very  recent  date,  the  acceptance  method,  however,  has  always 
existed  in  one  form  or  another,  but  its  standardization  and  recognition 
was  not  made  a  fact  until  the  adoption  of  the  Federal  Reserve  System. 

Earlier  substitutes  of  the  acceptance. — The  nearest  comparison  to 
the  acceptance  as  used  today  and  as  approved  by  the  leading  organiza- 
tions of  the  country,  was  the  two  name  paper  of  the  class  generally 
denominated  as  "drafts."  These  "drafts"  were  generally  drawn  by 
sellers  of  goods  upon  buyers  and  accepted  by  them,  but  their  handling 
was  not  made  a  systematic  and  uniform  method  of  procedure. 

The  "draft,"  as  commercial  paper,  may  have  arisen  in  various  ways, 
— not  exclusively  from  merchandise  transactions.  "Drafts,"  further- 
more, as  used  before  the  general  adoption  of  the  trade  acceptance 
method  in  this  country,  were  made  payable  to  third  parties  or  to  the 
order  of  the  drawer  and  could  be  realized  upon  for  the  purposes  of  dis- 
count, by  indorsement  of  the  drawer.  They  were  not  payable  at  any 
bank  specified  by  the  buyer,  and  contrary  to  the  legal  distinction  of  the 
modern  trade  acceptance,  the  bank  of  the  buyer  was  completely  out 
of  the  transaction,  and  was  not  obligated  to  pay  the  amount  of  the 
instrument  on  behalf  of  the  buyer. 

1 08 


Commercial  Banking  and  Credits  109 

The  fact  that  drafts  could  originate  both  from  trade  purposes  and 
from  past  due  obligations,  or  dealings  not  involving  the  sale  and  pur- 
chase of  merchandise,  made  them  an  uncertainty  as  to  commercial 
standing  and  questionable  as  to  the  security  behind  them.  In  this 
connection,  they  were  no  better  than  the  seller's  own  promissory  notes 
and  together  with  the  latter  were  the  predominating  class  of  com- 
mercial paper  in  this  country.  Even  today  single  name  paper  exists 
to  a  greater  extent  than  all  other  forms,  followed  by  the  acceptance. 

TRADE  ACCEPTANCE 

Purpose  of  acceptance. — The  purpose  of  the  trade  acceptance  system 
is  to  supply  a  means  for  the  settlement  of  accounts  by  "trade  ac- 
ceptances" and  it  is  designed  as  a  substitute  for  the  open  account  in  all 
cases  where  business  is  not  conducted  on  a  cash  basis  or  by  the  giving 
of  promissory  notes. 

Acceptance  not  adaptable  to  every  kind  of  business. — The  trade 
acceptance  is  not  adaptable  to  every  kind  or  branch  of  business,  and 
the  entire  question  of  such  adaptability  must  be  decided  upon  from  the 
particular  nature  of  the  business. 

For  instance,  it  could  not  be  expected  that  the  trade  acceptance 
should  act  as  a  substitute  for  a  system  of  cash  settlements  where  busi- 
ness is  conducted  entirely  upon  that  basis.  Neither  could  it  be  ex- 
pected to  offer  any  greater  facilities  in  the  conduct  of  any  business 
which  is  based  upon  the  periodical  settlement  of  bills  on  short  terms, 
of  say,  a  few  days,  for  that  is  practically  equivalent  to  a  system  of  cash 
settlements. 

Acceptance  a  scientific  credit  instrument. — The  acceptance  repre- 
sents generally  a  convenient  and  scientific  kind  of  credit  instrument 
which  could  be  used  to  great  advantage  in  all  lines  of  business  not 
upon  a  cash  or  upon  a  short  term  basis. 

Acceptance  and  note  distinguished. — The  trade  acceptance  must  be 
distinguished  from  a  promissory  note  or  a  sight  draft.  A  note  is 
drawn  by  a  person,  whereas  an  acceptance  is  drawn  on  a  person.  Trade 
acceptances  are  used  entirely  for  different  purposes  than  are  promis- 
sory notes.  Promissory  notes  are  used  generally  for  the  purpose  of 
borrowing  money  and  for  the  settlement  of  past  due  obligations.    The 


1 10  Bank  and  Trade  Acceptances 

underlying  basis  of  the  trade  acceptance  is  that  it  is  drawn  by  the 
seller  of  merchandise  on  the  purchaser  for  the  purchase  price  of  the 
goods  sold,  that  is,  arises  from  present  values.  When  accepted,  the 
trade  acceptance  constitutes  a  valid  promise  to  pay  on  a  specified 
date.  It  is  a  negotiable  instrument,  the  same  as  a  note.  The  trade 
acceptance  is  used  in  current  transactions  only.  It  has  nothing  to 
do  with  any  purposes  other  than  those  arising  from  a  transaction  in- 
volving the  sale  of  goods.  It  cannot  be  given  for  borrowed  money  or 
past  due  obligations. 

Trade  acceptance  arises  from  sale  of  goods. — The  trade  acceptance 
expresses  an  obligation  arising  from  the  sale  of  goods.  In  order  to 
understand  the  simplicity  and  procedure  involved  in  its  operation,  an 
example  beginning  from  the  time  of  sale  to  the  time  of  discharge  of  all 
parties  concerned,  is  given  in  the  following: 

Making  of  sale  on  terms  of  "trade  acceptance." — A  seller  having 
been  in  negotiations  with  a  buyer,  has  consummated  a  deal  for  the 
sale  to  the  latter  of  a  quantity  of  merchandise  at  a  stipulated  price, 
with  a  definite  term  of  payment  agreed  upon.  The  location  of  the 
buyer  and  seller  is  immaterial.  The  credit  of  the  buyer,  it  must  be 
assumed,  has  been  considered  by  the  seller,  and  all  terms  of  the  sale 
are  ready  to  be  carried  into  effect.  Assume,  also,  that  the  merchandise 
has  been  sold  on  terms  of  "trade  acceptance,"  having  a  maturity  of 
ninety  days. 

Drawing  of  trade  acceptance  by  seller  on  buyer. — The  seller  then 
draws  his  trade  acceptance  on  the  buyer,  stipulating  thereon  that  it 
arises  from  the  sale  of  goods,  and  forwards  it  to  the  buyer  together 
with  his  invoice  for  the  goods  sold.  Other  papers,  such  as  weight 
sheets,  bill  of  lading,  delivery  order,  etc.,  may  accompany  the  trade 
acceptance.  (For  forms  of  trade  acceptances  in  use,  see  Part  IV.  For 
ordinary  use,  Form  No.  1  is  recommended  as  the  best.  However, 
other  forms  are  equally  well  adaptable  for  other  classes  of  business 
and  it  is  a  matter  of  choice  with  users  as  to  which  form  is  most  ad- 
vantageous to  them). 

Buyer  "accepts"  thereby  certifying  to  correctness  of  sale. — The 
buyer  then  examines  the  trade  acceptance,  the  invoice,  and  the  other 
papers,  if  present,  to  see  that  all  terms  of  the  sale  are  in  accordance 


Commercial  Banking  and  Credits  hi 

with  the  original  intent  of  the  buyer  and  seller,  and  after  convincing 
himself  that  the  conditions  of  the  sale  have  been  complied  with  and 
that  the  trade  acceptance  is  in  proper  form,  and  after  he  is  willing  to 
assume  that  title  to  the  goods  has  passed  to  him,  he  accepts  the  trade 
acceptance  by  writing  across  the  face  of  the  instrument  the  word 
"accepted,"  the  date  of  acceptance,  and  the  place  of  payment.  If  it  is 
a  firm,  the  name  of  the  firm  and  the  individual  conducting  business 
thereunder,  is  signed  in  the  acceptance. 

Place  of  payment. — The  place  of  payment  is  usually  the  bank  of  the 
buyer.  By  the  Negotiable  Instruments  Law,  uniform  in  the  majority 
of  States  in  the  Union,  a  trade  acceptance  payable  at  a  designated  bank 
acts  in  the  same  manner  as  a  check,  and  upon  presentation  for  payment 
at  maturity  at  the  bank  of  the  buyer,  providing  sufficient  funds  are 
there  to  meet  it,  it  will  be  paid  the  same  as  a  check.  Five  states  in  all 
do  not  recognize  the  negotiable  Instruments  Law  and  an  acceptance 
therefore  in  those  states,  does  not  take  the  form  of  a  check.  After  be- 
ing accepted  in  the  above  form,  the  buyer  returns  the  trade  acceptance 
to  the  seller. 

Presenting  draft  for  acceptance  and  payment. — If  the  seller  prefers, 
he  may  present  the  acceptance  to  the  buyer  himself  together  with 
the  bill.  On  the  other  hand,  if  he  think  it  more  desirable,  or  if  the 
buyer  is  not  in  his  town,  he  may  request  his  bank  to  handle  the  ac- 
ceptance and  collection  of  the  draft,  in  which  case  he  would  give  to 
the  bank  all  papers  necessary  to  the  transaction,  together  with  the  ac- 
ceptances. The  bank  would  then  present  the  trade  acceptance  to  the 
buyer  on  behalf  of  the  seller,  and  after  having  been  accepted  by  the 
buyer,  it  would  either  be  held  by  the  bank  to  maturity,  when  payment 
would  be  made  by  the  buyer.  In  this  connection,  the  seller,  has  his 
choice.  He  may  either  receive  from  his  bank  the  accepted  paper,  hold- 
ing it  to  maturity,  when  he  would  again  hand  it  back  to  his  bank,  or 
he  could  request  the  bank  to  hold  the  acceptance  until  maturity. 

Negotiation  of  accepted  paper. — After  the  seller  has  received  the 
accepted  paj^er,  he  may  arrange  to  have  it  negotiated.  By  this  is  meant 
that  the  seller  may  have  the  trade  acceptance  discounted,  in  which 
case  are  brought  together  the  acceptor,  the  seller,  the  bank,  the  note 
broker  and  the  Federal  Reserve  Bank.  The  position  of  the  seller  is 
that  of  the  holder  of  the  accepted  paper.  The  ])uyer  figures  as  the 
party  obligated  to  pay  the  acceptance  at  maturity.  The  note  broker  or 


112  Bank  and  Trade  Acceptances 

commercial  paper  broker  is  the  intermediary  between  the  seller  and  the 
bank.  To  him  is  generally  given  the  work  of  selling  the  accepted 
paper  to  some  bank  or  investor.  The  seller  may  deal  with  the  bank 
direct,  but  in  this  case  it  is  the  general  opinion  that  he  is  benefited 
much  more  by  letting  the  broker  handle  the  transaction,  as  the  latter 
is  familiar  with  the  market  for  commercial  paper  and  generally  knows 
where  the  greatest  demand  for  the  same  exists,  thereby  being  enabled 
to  obtain  the  best  rate  of  discount. 

Rediscounting  of  acceptances. — After  the  acceptance  has  been  dis- 
counted with  the  bank  or  discount  house,  it  may  be  held  by  the  latter 
in  its  portfolio  until  maturity.  It  may,  however,  be  rediscounted 
with  the  Federal  Reserve  Bank,  if  its  maturity  does  not  exceed  ninety 
days,  and  if  it  otherwise  conforms  in  all  respects  to  the  requirements 
of  the  Federal  Reserve  Board  governing  eligible  paper.  Acceptances, 
however,  arising  from  commercial  transactions  are  the  only  ones  which 
are  eligible  for  rediscount  with  the  Federal  Reserve  Banks,  notwith- 
standing their  maturity  exceeds  ninety  days,  but  which  must  not  ex- 
ceed six  months.  The  Federal  Reserve  Banks  are  the  largest  pur- 
chasers of  this  class  of  commercial  paper,  and  at  the  present  time  are 
really  the  supporters  of  the  American  discount  market.  It  is  like  a 
financial  balancing  wheel  to  the  country  and  places  the  obligations  of 
seller,  buyer  and  banker  in  that  part  of  the  country  which  can  best 
meet  it.  It  standardizes  commercial  methods.  It  creates  bankable 
paper  of  a  class  much  more  valuable  than  the  open  book  account. 

Recording  and  accounting. — There  are  no  difficulties  to  be  experi- 
enced by  users  of  the  acceptance  method,  either  the  buyer,  the  seller 
or  the  bank,  in  the  bookkeeping,  and  recording  of  trade  acceptances. 
They  are  essentially  the  same  in  nature  as  the  ordinary  bills  receivable. 
In  Part  IV,  the  very  last  form  is  an  illustration  of  a  so-called  ac- 
ceptance register.  Entries  are  made  therein  according  to  the  date  of 
receipt  of  the  accepted  paper.  At  the  time  of  sale,  an  entry  similar  to 
that  made  under  the  open  book  account  system,  is  recorded  in  the  sales 
books  of  the  seller.  As  the  acceptance  operates  as  a  settlement  of  the 
transaction  representing  in  itself  a  liquid  asset,  and  in  place  of  the 
seller's  assets  in  the  form  of  open  accounts,  it  is  therefore  applied  as  a 
credit  to  oflFset  the  debit  account  of  the  customer  arising  from  the  sale 
of  the  goods.  An  account  would  be  created  such  as  "Trade  Acceptances 
Receivable"  or  "Acceptances  Receivable."  Expressed  in  simple  ac- 
count form,  entries  would  be  made  as  follows :  Upon  the  sale  of  goods ; 


Commercial  Banking  AND  Credits  113 

"Dr.  Customer 

Cr.  Merchandise" 
At  the  time  the  trade  acceptance  is  received : 

"Dr.  Trade  Acceptances  Receivable 
Cr.  Customer." 
At  the  time  the  trade  acceptance  is  paid : 
"Dr.  Cash 
Dr.  Less  charges  if  any. 

Cr.  Trade  Acceptances  Receivable." 

Collections  and  other  charges. — Banks  usually  charge  a  customary 
rate  for  the  collection  of  trade  acceptances,  of  from  l/20th  to  1/lOth 
percent  of  the  face  amount  of  the  instrument.  This  charge  is  generally 
borne  by  the  seller.  Acceptances,  as  time  paper  are  taxable  under  the 
Federal  Revenue  Act.  This  charge  may  be  carried  either  by  buyer  or 
seller,  depending  upon  the  prior  understanding  of  the  parties.  (Refer 
Part  V,  Taxation  of  Negotiable  Instruments.) 

Rediscount  of  acceptances  with  sources  other  than  Government. — 

The  bank  is  also  enabled  to  have  the  paper  rediscounted  with  so- 
called  discount  houses  which  make  a  specialty  of  this  class  of  business. 
They  act  in  the  capacity  of  banks,  purchasing  the  commercial  paper 
for  sale  at  an  opportune  time. 

Discharge  of  acceptor  or  extension  of  time. — The  acceptor  either 
pays  the  draft  at  maturity  or  secures  an  extension  of  time.  To  secure 
an  extension  of  time,  it  would  be  necessary  for  the  acceptor,  that  is, 
the  buyer,  to  have  a  definite  agreement  with  the  seller.  If  the  buyer's 
business  reputation  is  of  a  fair  standing  and  his  business  ability  recog- 
nized, he  should  meet  with  no  difficulty  in  obtaining  an  extension  of 
time,  should  he  find  it  necessary. 

Summary  of  procedure. — Summed  up,  the  procedure  would  be : 
First,  the  sale ; 

Second,  the  drawing  of  the  acceptance  by  the  seller  on  the  buyer; 
Third,  the  acceptance  by  the  buyer  and  the  return  of  the  same  to  the 

seller; 
Fourth,  the  keeping  of  the  acceptance  until  maturity  by  the  seller, 

or  the  discounting  of  the  acceptance  with  a  bank  or  discount 

house,  direct  or  through  the  intermediary  of  a  commercial 

paper  broker ; 


114  Bank  AND  Trade  Acceptances 

Fifth,  the  rediscount  of  the  acceptance  by  the  bank  or  discount 
house  with  the  Federal  Reserve  Bank;  and 

Sixth,  the  payment  of  the  acceptance  and  the  closing  of  the  trans- 
action. 

Comparison  between  acceptance  and  open  account. — How  then  does 
the  acceptance  compare  with  the  open  account  method?  The  ac- 
cepted paper  gives  to  the  account  a  general  liquidity.  It  may  be  realized 
upon  through  the  process  of  discounting  and  rediscounting,  with 
greater  ease  than  the  open  account.  It  releases  the  billions  of  dollars 
tied  up  in  open  accounts,  awaiting  settlement,  and  enables  the  seller 
thereby  to  do  a  greater  business  on  a  minimum  of  capital  employed. 

Elsewhere  in  the  following  chapters,  there  are  given  outlines  of  the 
advantages  to  the  buyer,  to  the  seller,  to  the  banker,  to  the  consumer 
and  to  general  business,  of  the  acceptance  method,  in  comparison  with 
the  open  account.  It  is,  therefore,  unnecessary  to  detail  such  advan- 
tages at  present.  The  bank  takes  over  a  very  important  form  of 
banking  business  and  practically  takes  from  the  hands  of  the  seller  the 
burden  of  financing  both  himself  and  the  buyer. 

The  acceptance  makes  for  better  business  methods,  is  more  safe, 
more  economical  and  much  more  practicable  than  the  open  account 
method.  It  is  a  sort  of  governor  to  general  business.  It  creates  a 
cycle  of  liquidity  between  commerce  and  finance. 


CHAPTER  VIII 

THE  BUYER  AND  THE  TRADE  ACCEPTANCE 

The  Buyer  Considered 

Notwithstanding  the  advantages  to  the  seller  and  the  banker  as  well 
as  to  general  business  through  the  employment  of  the  acceptance  method, 
it  has  been  asked  time  and  again  by  the  buyer  "What  benefit  does  the  ac- 
ceptance give  to  me  ?"  There  is  a  feeling  prevalent  among  buyers,  though 
they  are  themselves  sellers,  that  the  acceptance  method  is  of  disadvantage 
to  them.  However,  this  is  not  so.  The  mistaken  impression  that  the 
buyer  has  formed  to  the  effect  that  the  acceptance  is  not  practicable  for 
his  use  may  be  due  to  the  fact  that  previous  discussions  have  not  been 
directed  to  stress  such  advantages  to  him  in  the  proper  way.  Apparently 
we  have  acted  as  though  we  consider  this  the  weak  end  of  the  situation. 
The  arguments  we  give  to  the  buyer  are  very  much  like  those  of  the  old 
lady  who  is  handing  her  son  a  lot  of  bitter  medicine,  not  because  he  likes 
it  but  because  it  is  good  for  him  and  may  help  him  later  on.  Further 
than  this,  the  buyer  has  considered  that  the  acceptance  is  more  or  less 
being  forced  upon  him,  and  its  advantages,  if  it  has  any,  are  for  the  benefit 
of  the  seller  and  not  for  him.  In  order  that  this  conviction  may  be  over- 
ruled, it  is  the  purpose  of  the  present  chapter  to  outline,  though  briefly,  at 
least  some  of  the  advantages  which  the  buyer  derives  from  the  acceptance 
method. 

ACCEPTANCE  STRENGTHENS  CREDIT  POSITION  OF  BUYER 
IN  THE  ESTIMATION  OF  HIS  BUSINESS  ASSOCIATES 

The  trade  acceptance  improves  the  business  standing  and  credit  of  the 
buyer  in  that  it  gives  to  the  seller  a  negotiable  evidence  of  indebtedness 
with  a  fixed  maturity  date.  The  buyer  in  this  way  puts  himself  in  a  class 
of  preferred  merchants  in  much  the  same  way  as  those  who  discount  their 
bills  for  cash,  since  the  acceptance  in  the  hands  of  the  seller  could  be  dis- 
counted without  an  immediate  payment  of  money  by  the  buyer,  in  settle- 
ment of  his  obligation. 

The  impression  conveyed  to  the  seller  by  the  willingness  of  the  buyer 
to  "accept,"  raises  the  credit  standing  of  the  buyer  in  the  seller's  estima- 

"5 


ii6  Bank  AND  Trade  Acceptances 

tion.  The  buyer,  by  giving  the  acceptance  to  the  seller,  reduces  the  debt 
to  writing,  thereby  demonstrating  his  good  faith  in  the  transaction. 

As  a  concrete  example,  the  majority  of  raw  silk  importers  and  dealers 
in  this  country  do  not  care  to  sell  their  products  to  even  the  best  of  houses 
if  the  basis  of  credit  does  not  embody  the  giving  of  a  trade  acceptance. 
A  certain  firm  operating  no  less  than  two  dozen  mills  will  not  be  sold  by 
one  of  these  raw  silk  importers  on  open  account  to  the  extent  of  a  ten 
bale  shipment,  whereas,  if  trade  acceptances  are  the  basis  of  sale,  mer- 
chandise will  be  sold  on  credit  to  the  extent  of  two  hundred  and  fifty  bales. 
It  is  evident  from  the  above  that  the  credit  standing  of  the  buyer  be  raised 
in  the  estimation  of  the  seller,  and  serves  as  an  indication  of  how  some 
houses  prefer  an  acceptance  and  will  not  hesitate  to  extend  the  limit  of 
credit  to  buyers  who  will  use  it. 

The  seller  desires  the  acceptance,  not  because  he  may  or  may  not  be  in 
need  of  the  money,  but  because  he  wants  to  be  assured  of  liquidity  of  his 
assets,  afforded  by  the  acceptance.  May  it  not,  therefore,  be  said  that  the 
acceptance  serves  to  strengthen  the  credit  of  the  buyer?  Not  alone  this 
advantage,  for  the  acceptance  puts  the  buyer  in  the  position  of  a  preferred 
purchaser,  as  the  giving  of  an  acceptance  entitles  him  to  better  considera- 
tion, which,  if  he  knows  his  ground,  he  will  invariably  be  successful  in 
obtaining. 

ACCEPTANCE  DEVELOPS  CAREFUL  BUYING 

A  buyer  who  gives  trade  acceptances  will  buy  more  carefully.  This  is 
true,  because  if  he  knows  that  he  has  to  meet  payments  at  definite  dates, 
he  will  not  overbuy.  A  great  deal  of  overbuying  is  done  honestly  but 
through  poor  judgment.  If  a  buyer  knows  he  must  meet  those  obliga- 
tions strictly,  he  will  realize  the  necessity  of  exercising  most  careful 
judgment.  The  acceptance  is,  in  other  words,  a  regulator  of  business  for 
the  buyer  and  is  of  direct  benefit  to  him.  Naturally,  one  must  always 
guard  against  a  man  who  is  inclined  to  overbuy  from  questionable  motives. 
The  acceptance,  therefore,  prevents  overbuying,  and  indirectly  benefits 
the  buyer  by  keeping  him  away  from  the  dangersi  prevalent  in  credit 
over-extension. 

ACCEPTANCE  OF  BUYER  RENDERS  HIS  CREDIT  AS 

TANGIBLE  AS  CASH 

The  mercantile  agency  of  R.  G.  Dun  &  Company,  in  asking  the  busi- 
ness houses  of  the  country  for  a  statement  as  to  their  financial  standing 


Commercial  Banking  and  Credits  117 

to  serve  as  a  basis  for  judging  their  credit,  emphasizes  the  fact  that 
credit  is  as  tangible  as  cash  and  should  be  guarded  and  used  accordingly. 
It  is  a  proven  fact  that  the  European  countries  using  the  acceptance  do 
at  least  five  times  as  large  a  business  with  the  capital  which  they  employ 
as  the  United  States  does  with  its  own.  It  is  therefore,  self-evident  that 
the  Europeans  know  how  to  use  credit  better  than  we,  and  in  using  this 
credit  privilege,  they  take  care  not  to  abuse  it.  The  evils  flowing  from 
the  open  account  system  of  transacting  business  are  such  that  they  work 
at  a  disadvantage  to  the  buyer  in  the  end.  By  the  use  of  the  acceptance, 
the  buyer  cannot  help  but  pay  more  attention  to  its  purpose  and  more 
attention  to  the  strenuous  nature  of  its  obligation. 

THE  BUYER  AS  THE  SELLER 

Buyers  on  the  acceptance,  in  conserving  their  credit  ability,  and  es- 
tablishing their  credit  standing,  are  therefore  enabled  to  employ  it  to  a 
greater  extent  than  money  itself. 

The  buyer,  being  at  times  the  seller, — it  must  be  remembered,  if  he 
advances  the  argument  that  he  is  not  receiving  as  much  benefit  as  the 
seller  derives  from  the  acceptance  method,  that  his  condition  is  frequently 
reversed  and  that  he  himself  is  as  frequently  seller  as  he  is  the  buyer. 
If  he  gets  acceptances  from  his  trade,  he  cannot  very  well  refuse  to  give 
them  when  his  seller  asks  for  them. 

ACCEPTANCE  AFFORDS  BUYER  BETTER  TERMS  OF  SALE 

In  order  that  the  buyer  may  receive  the  maximum  of  benefit  from  the 
trade  acceptance,  it  will  be  necessary  that  he  understand,  first,  the  proced- 
ure involved  and  its  use,  thoroughly.  The  more  the  trade  acceptance  is 
used  by  the  buyer,  the  more  consideration  he  can  demand.  In  other 
words,  he  must  be  on  his  job  or  else  he  is  not  going  to  get  the  advantage 
he  is  entitled  to.  He  must  know  how  to  put  it  up  to  the  seller  that  he  is 
entitled  to  an  advantage.  He  is  giving  the  seller  what  the  seller  wants, — 
a  trade  acceptance.  He  is  giving  the  seller  something  that  is  of  value  to 
him,  whereby  the  latter  acquires  a  good  deal  of  advantages  otherwise  lost 
in  the  open  book  account  system.  This  is  worth  something  to  the  buyer, 
and  if  he  is  a  wise  buyer  he  will  get  something  that  no  open  account  could 
get  for  him.  Moreover,  many  sellers  throughout  the  country  who  use  the 
trade  acceptance  in  their  business,  offer  considerable  advantages  to  ac- 
ceptor buyers,  in  price,  terms,  discounts,  etc. 


ii8  Bank  AND  Trade  Acceptances 

ACCEPTANCE  OF  ADVANTAGE  TO  SMALLER  CONCERN 

The  giving  of  a  trade  acceptance  will  do  more  for  the  small  buyer  than 
the  open  account  method  can  do  for  him,  because  it  will  enable  him  to 
operate  in  competition  with  the  bigger  concern.  As  an  example,  let  us 
take  the  case  of  a  small  jobber  of  limited  capital.  Let  us  assume  that  he  is 
careful  and  efficient  and  has  an  opportunity  to  buy  a  quantity  of  goods 
at  an  advantageous  price.  Let  us  further  assume  the  price  of  the  goods 
to  be  One  Thousand  Dollars.  He  knows  where  he  can  make  a  turnover 
at  a  few  hundred  dollars  profit.  He  knows  also  that  he  can  buy  on  ninety 
days'  time  and  that  he  will  have  to  sell  on  ninety  days'  time,  but  there  is  a 
little  gap  of  time  in  between  the  day  he  has  to  pay  for  the  goods  and  the 
day  he  gets  his  payment,  due  to  delivery,  handling  of  the  order,  etc.  He 
could  not  very  well  handle  this  transaction  on  open  account  for  the  bank 
would  not  lend  him  more  than  half  of  the  selling  price  of  his  accounts 
receivable,  besides  requiring  a  deposit  as  additional  security.  In  other 
words,  the  amount  he  could  loan  will  be  far  less  than  the  amount  required 
for  the  carrying  out  of  the  transaction. 

But  if  the  small  buyer  resorts  to  the  acceptance  method,  how  easily  this 
transaction  could  be  financed.  If  the  jobber  knows  where  the  goods  are 
and  where  they  can  be  bought  and  sold,  he  may  give  his  acceptance  for  the 
purchase  price  at  the  time  of  buying.  The  seller's  bank  will  cash  the 
buyer's  acceptance  for  him  and  give  him  his  money.  The  jobber  then 
takes  the  other  man's  acceptance  for  the  selling  price,  turns  it  into  his  own 
bank  and  cashes  his  profit.  The  entire  transaction  is  completed  and  the 
buyer  has  profited  thereby.  It  has  not  cost  him  a  dollar  of  his  own 
money— a  rather  easy  accomplishment.  The  procedure  enables  a  small 
retailer  to  operate  on  a  more  extensive  scale  than  would  be  possible  on  a 
cash  or  open  account  basis,  where  he  has  to  go  in  and  borrow  the  money 
required  for  the  transaction. 

ACCEPTANCE  DEVELOPS   SOUNDER  AND  MORE  SERIOUS 
ATTITUDE  TOWARDS  BUYER'S  OWN  OBLIGATIONS 

Buyers  frequently  allow  their  accounts  to  accumulate  to  such  an  extent 
that  they  find  themselves  at  times  in  a  very  embarrassing  position,  which 
invariably  places  great  hardship  upon  them.  This  is  especially  so  under 
the  open  book  account  system,  where  the  buyer,  not  because  he  wants  to, 
but  for  the  reason  that  the  conveniences  afforded  by  that  system  permit 
him  to  entail  great  credit  responsibility,  finds  sooner  or  later  that  the  prac- 
tice is  a  very  dangerous  one.     Where  credit  is  extended  in  no  definite 


Commercial  Banking  and  Credits  119 

amount  and  where  it  is  easy  to  be  obtained,  a  general  tendency  towards 
speculation  sets  in.    It  usually  works  out  to  the  buyer's  disadvantage. 

The  acceptance  prevents  the  accumulation  of  over-due  accounts  and 
develops  a  sounder  attitude  towards  the  buyer's  own  obligations.  He 
realizes  his  credit  privileges,  and  takes  care  that  they  are  always  available 
to  him  in  his  business.  It  develops  for  him  also,  the  tendency  of  regulat- 
ing his  business  according  to  the  extent  of  his  assets.  The  acceptance, 
therefore,  to  the  buyer,  may  not  appear  to  be  of  advantage  to  him  directly, 
but  its  use  produces  an  indirect  benefit,  enables  him  to  keep  better  tract  of 
his  outstanding  obligations  and  avoids  the  evils  of  over-extension. 

ACCEPTANCE  BENEFITS  BUYER  BY  REDUCING  PRICE  OF 

GOODS 

In  a  previous  topic  contained  in  the  present  chapter,  one  advantage  was 
given  accruing  to  the  buyer  from  the  use  of  the  acceptance,  as  a  means  of 
settling  his  obligations,  in  that  he  ofifers  the  seller  a  better  credit  instru- 
ment which  is  worth  something  to  him.  The  buyer,  if  he  knows  how  to 
use  this  argument  in  making  his  purchases,  will  generally  be  able  to  ob- 
tain greater  privileges  than  the  buyer  on  open  account. 

The  open  account  system  of  transacting  business  is  accompanied  by 
great  evils  which  indirectly  tend  to  raise  the  selling  price  of  goods.  For 
instance,  the  seller,  due  to  the  fact  that  losses  are  greater  under  the  open 
account  system,  and  that  costs  are  higher  as  regards  collection  and  account 
carrying,  loss  in  interest,  capital  tied  up  and  reduction  in  merchandise 
values,  is  forced  to  raise  the  price  of  his  goods  and  must  seek  to  get  back 
this  increase  from  no  other  source  but  the  buyer.  The  seller  knows  that 
if  he  has  a  trade  acceptance  of  the  buyer  in  his  possession,  he  is  able  to 
obtain  funds  at  any  time  by  discovmting  the  paper.  He  knows  also  that 
the  cost  of  conducting  business  due  to  the  elimination  of  risk  involved 
in  the  open  account  method  is  materially  lessened. 

It  will  invariably  be  found  that  the  seller,  therefore,  is  willing  to  show 
his  appreciation  of  the  acceptance  method  of  settlement  by  affording  the 
buyer  a  better  consideration,  which  is  usually  a  lower  cost  of  merchandise. 
The  large  users  of  acceptances  in  this  country  offer  buyers  better  selling 
terms,  that  is,  a  longer  time  within  which  to  effect  settlement  in  money 
by  the  trade  acceptance  method,  knowing  that  thereby  their  capital  is  not 
tied  up  and  could  be  made  available  to  them  at  short  notice.  In  other 
words,  the  buyer  who  buys  goods  on  the  open  book  account  method,  is 
paying  for  the  inefficiency  of  that  system.     He  has  to  pay,  or  the  seller 


120  Bank  and  Trade  Acceptances 

cannot  stay  in  business.  Therefore,  anything  that  he  can  save  the  seller 
can  be  received  as  a  concession  by  an  "acceptance  time  buyer"  just  as  well 
as  by  a  "cash  over  the  counter  buyer." 

BUYER  BENEFITED   BY   THE   EXTENSION    OF   CREDIT 
UNDER  THE  ACCEPTANCE  METHOD 

The  buyer  is  able  to  extend  his  operations  with  greater  facility  through 
the  acceptance  than  is  possible  under  the  open  book  account  method. 
The  advantages  which  the  buyer  receives  from  a  reduced  price  of  mer- 
chandise and  from  better  credit  and  sales  terms  on  the  acceptance  basis, 
permit  him  to  conduct  his  business  more  economically  and  with  a  lower 
capital  amount  than  is  otherwise  possible.  He  is  then  enabled  to  either 
sell  his  merchandise  at  an  increased  profit  or  increase  his  sales  through 
lower  prices,  thereby  greatly  extending  his  business. 

BUYER  DOES  NOT  WAIVE  ANY  LEGAL  RIGHTS  AGAINST 

SELLER  WHICH  HE  WOULD  OTHERWISE  ENJOY  UNDER 

OPEN  BOOK  ACCOUNT  METHOD 

It  is  generally  thought  by  buyers  that  the  giving  of  an  acceptance 
forces  them  to  give  up  their  legal  rights  which  they  otherwise  retain 
under  the  open  account.  The  buyer  under  the  open  account  system 
can  always  contest  the  correctness  of  the  details  of  the  merchandise 
transaction,  such  as  wrong  deliveries,  goods  not  up  to  standard,  short 
weight,  etc.  By  the  giving  of  a  trade  acceptance,  it  is  true  that  the  buyer 
does  obligate  himself  to  its  payment  at  maturity,  but  he  thereby  does  not 
give  up  any  legal  rights  against  the  seller  if  he  pleads  incorrect  deliveries, 
short  weights,  or  if  he  has  other  complaints  against  the  seller  contrary 
to  the  original  intent  of  the  parties  at  the  time  of  sale.  In  contesting  the 
validity  of  the  transaction,  he  must  however,  prove  his  case  affirmatively. 

But  this  point,  however  regarded,  should  not  be  an  obstacle  in  the  way 
of  adopting  and  using  the  acceptance  method,  for  the  buyer  may  satisfy 
himself  as  to  all  conditions  of  sale,  express  or  implied,  to  see  that  they 
are  correct  in  all  details,  before  accepting. 

THE  BUYER  AND  THE  BANKER 

Acceptance  Raises  Banker's  Estimation  of  Buyer 

The  best  bankers  consider  the  trade  acceptance  method  as  far  superior 
to  the  open  account   system,   or  to   the   single  name   paper  method   of 


Commercial  Banking  and  Credits 


121 


financing  business  transactions.  The  appearance  in  the  buyer's  financial 
statement  of  "acceptances  payable"  instead  of  "accounts  payable"  con- 
vinces the  banker  that  the  buyer  practices  careful  habits,  that  he  is  dis- 
cretionary in  his  business,  and  that  he  is  careful  in  his  credit  dealings. 
The  use  of  the  acceptance  method  by  the  buyer  is  looked  upon  by  the 
banker  as  more  businesslike  than  the  open  account  method. 


CHAPTER  IX 

The  Seller  and  the  Trade  Acceptance 

The  following  are  a  few  advantages  which  the  seller  receives 
through  the  use  of  acceptances  in  substitution  of  the  open  book  ac- 
count. 

THE  ACCEPTANCE  PROVIDES  A  LIQUID  ASSET 

What  is  of  very  great  importance  to  the  seller  in  the  use  of  the 
acceptance,  is  the  fact  that  he  thereby  gains  a  means  of  realizing  upon 
his  open  book  accounts,  in  rapid  time,  if  necessary.  Under  the  open 
book  account  method,  there  are  two  means  which  the  seller  may 
avail  himself  of,  in  order  to  secure  funds,  the  first  being  the  discounting' 
of  his  own  paper  or  promissory  note,  and  the  second,  selling  or  assign- 
ing his  open  book  accounts.  The  disadvantages  of  these  two  methods 
of  realizing  upon  the  seller's  assets  not  only  cause  a  loss  of  time, 
but  result  in  unprofitableness  to  him,  for  the  procedure  in  the 
second  method  of  assigning  accounts  is  a  costly  one,  besides  convey- 
ing an  unbusinesslike  impression.  Neither  does  the  giving  of  a  seller's 
note  gain  for  him  the  privileges  which  the  acceptance  does. 

The  trade  acceptance,  however,  gives  to  the  account  liquidity,  and 
the  seller  may  realize  upon  it  at  any  time,  through  the  process  of  dis- 
counting. His  capital  assets  are  thereby  put  into  liquid  shape.  The 
use  of  the  trade  acceptance  would  remove  the  necessity  of  the  manu- 
facturer or  jobber,  with  somewhat  limited  capital,  to  borrow  so  heavily, 
in  order  to  act  as  banker  in  supplying  credit  to  customers,  and  a 
broader  market  would  be  opened  for  his  paper  at  most  favorable  rates. 

ACCEPTANCE   RELIEVES   SELLER   FROM   FINANCING 

CUSTOMER 

Under  the  open  book  account  method,  considerable  burden  has  to 
be  carried  by  the  seller  of  merchandise,  in  that  he  is  obliged  to  prac- 
tically finance  the  buyer,  through  means  of  credit  extensions.     His 

122 


Commercial  Banking  and  Credits  123 

operations  are,  as  a  result,  limited  and  he  must  wait  until  he  realizes 
upon  the  buyer's  obligations.  The  open  book  account  method,  more- 
over, does  not  afford  any  liquid  asset  to  the  seller,  and  for  this  reason, 
a  like  burden  is  imposed  upon  him  in  the  financing  of  his  own  busi- 
ness. 

By  the  trade  acceptance  method  the  seller  may  dispose  of  the  accep- 
tances representing  the  accounts  of  the  buyer,  obtaining  thereby  avail- 
able funds  according  to  his  needs  and  thus  relieving  him  from  financing 
the  buyer.    This  is  accomplished  by  discounting  his  acceptances. 

ACCEPTANCE  CREATES  A  SYSTEMATIC  BASIS  OF  INCOME 

ON  SELLER'S  ASSETS 

A  seller  receives  great  benefit  from  having  his  accounts  in  the  form 
of  acceptances,  as  he  then  knows  that  he  will  receive  stipulated  sums 
of  money  as  the  acceptances  mature.  He  is,  therefore,  enabled  to 
conduct  his  business  along  the  lines  permitted  by  the  extent  of  his 
capital  and  income.  The  seller  is,  moreover,  relieved  from  unneces- 
sary worries,  knowing  that  at  each  maturity,  he  will  have  so  much 
with  which  to  continue  the  operations  of  his  business.  In  other  words 
the  seller  has  more  certainty  as  to  payment  at  definite  periods. 

ACCEPTANCE  TENDS  TO   CONFINE  BORROWING  TO 
FUNDS  ACTUALLY  NEEDED 

Sellers  invariably  find  themselves  in  need  of  funds  at  different  times, 
with  which  to  tide  them  over  some  difiiculties  in  their  financing.  If 
they  are  forced  to  dispose  of  their  assets  in  the  form  of  open  book 
accounts,  in  the  limited  ways  open  to  them  for  this  purpose,  they  will 
find  that  the  operation  is  a  very  costly  one. 

At  one  stated  period,  a  seller  may  be  in  need  of  a  limited  amount  of 
funds,  but  if  he  must  count  upon  realizing  on  his  open  book  accounts, 
the  safest  way  is  generally  to  figure  the  amount  of  money  to  come  in 
as  much  less  than  is  owing  to  him.  The  result  is  that  he  is  forced  to 
borrow  more  funds  than  are  actually  needed  to  carry  on  his  business. 
With  the  acceptance,  this  condition  is  remedied  as  the  seller  knows 
the  exact  amount  of  money  that  will  come  in  as  a  result  of  their 
maturing. 

One  advantage  of  the  acceptance,  and  to  which  bankers  and  business 


124  Bank  and  Trade  Acceptances 

men  throughout  the  country,  who,  as  users  and  advocates  of  the 
acceptance  will  testify,  is  that  trade  acceptances  are  generally  met 
promptly  when  they  fall  due.  In  rare  cases  is  an  extension  of  time 
required  or  asked  for. 

ACCEPTANCES  RELIEVE  SELLER  FROM   NECESSITY  OF 
SELLING  OR  ASSIGNING  OPEN  BOOK  ACCOUNTS 

A  general  practice  among  business  men  who  conduct  their  trans- 
actions under  the  open  book  account  method,  and  who  find  themselves 
in  need  of  funds,  is  to  realize  upon  their  open  accounts.  To  effect  this 
purpose,  it  becomes  necessary  for  them  to  "sell"  or  assign  these  ac- 
counts. During  the  past  decade,  there  have  come  into  existence 
numerous  commission  bankers  and  commission  houses,  which  make  a 
specialty  of  buying  "accounts  receivable,"  that  is,  open  book  accounts, 
and  make  advances  thereon  to  the  seller. 

Commercial  bankers  and  commission  houses  engaged  in  this  kind 
of  business  usually  charge  a  much  higher  rate  of  interest,  or  discount 
open  book  accounts  at  a  much  higher  rate  than  the  customary  charge 
for  discounting  trade  acceptances.  The  operation  is,  therefore,  a 
costly  one,  and  is  unprofitable  to  the  seller. 

Should  the  seller  who  holds  trade  acceptances  find  himself  in  need 
of  funds,  he  may  acquire  same  through  their  discount. 

ACCEPTANCES    PERMIT    OPERATION    OF   A    SO-CALLED 
"BUDGET  SYSTEM"  OF  FINANCING  BUSINESS 

Governments,  as  well  as  the  larger  commercial  and  financial  organ- 
izations of  the  country,  have  learned  from  experience  that  the  safest 
way  to  conduct  their  financial  affairs  is  on  the  plan  of  a  budget,  that 
is,  on  an  income  and  expenditure  schedule.  The  seller,  for  instance, 
is  able  to  calculate  the  amount  of  money  he  will  need  for  disburse- 
ments during  a  certain  period.  Likewise,  in  order  to  meet  these  neces- 
sary disbursements,  he  will  apply  against  them  his  possible  receipts. 
On  account  of  the  better  commercial  standing  and  conveniences  af- 
forded by  the  acceptance,  the  seller  is  able  to  calculate  as  nearly  as 
possible  the  amount  of  money  he  will  require,  much  more  efficiently 
than  is  possible  under  the  open  account  method.  As  a  result,  it  would 
eliminate  the  necessity  of  borrowing  in  excess. 


Commercial  Banking  and  Credits  125 

ACCEPTANCE  ESTABLISHES  EVIDENCE  OF  COMPLETED 

TRANSACTION 

The  trade  acceptance  in  the  hands  of  the  seller,  in  place  of  the  open 
book  account  furnishes  the  best  evidence  of  a  completed  transaction  in 
merchandising,  and  places  the  burden  of  proving  the  correctness  of 
the  details  connected  with  the  transaction  upon  the  buyer.  It  enables 
the  seller  effectively  to  disprove  of  the  possible  necessity  of  subse- 
quent proof  of  the  legal  status  of  the  transaction. 

Trade  acceptances  exhibit  for  inspection  the  highest  class  of  ac- 
counts. The  necessity  of  accepting  a  seller's  draft  drawn  upon  the 
buyer  will  cause  the  latter  to  make  every  possible  investigation  of 
the  correctness  of  the  transaction  beforehand,  which  will  diminish  to 
a  great  extent  any  inconvenience,  as  frequently  arises  under  the  open 
book  account  system. 

ACCEPTANCE  EFFECTS  ECONOMY  IN  TIME  AND 

EXPENSE 

The  business  houses  and  banks  which  have  used  the  acceptance  and 
have  studied  its  advantages  from  every  angle,  testify  to  the  fact  that 
it  is  the  least  expensive  of  all  other  forms  of  settlement,  from  a  stand- 
point of  economy  in  time  and  expense,  and  as  regards  cost  of  collec- 
tions, handling  of  accounts,  accounting  and  general  recording.  The 
seller,  when  he  receives  the  acceptance  from  the  buyer  treats  the  draft 
as  a  settlement  of  the  open  book  account  and  transforms  it  into  a  liquid 
asset  with  negotiable  value. 

THE  ACCEPTANCE  AS  A  MEANS  OF  GAUGING  MORE  ACCU- 
RATELY THE  CREDIT  STANDING  OF  THE  BUYER 

The  use  of  the  acceptance  enables  the  seller  to  gauge  more  accu- 
rately the  credit  standing  and  paying  habits  of  the  buyer.  Under  the 
open  book  account  system  of  settling  accounts,  the  buyer  generally 
allows  his  accounts  to  lag  over  past  maturity,  to  the  disadvantage  of 
the  seller.  Furthermore,  the  open  book  account  system  frequently 
gives  rise  to  discrepancies  in  the  transactions,  as  a  result  of  which  the 
buyer  must  at  times  forego  his  reputation  of  established  credit  and 
good  business  conduct.     By  this  is  meant  that  the  open  book  account 


126  Bank  and  Trade  Acceptances 

method  is  productive  of  errors  interfering  with  the  conduct  and  busi- 
ness relations  of  the  parties.  The  acceptance  affords  the  seller  a  means 
of  learning  the  paying  habits  of  the  buyer,  and  of  how  the  buyer  meets 
his  obligations. 

ACCEPTANCE  STRENGTHENS  THE  SELLER'S  FINANCIAL 

STANDING 

In  a  preceding  topic  there  were  discussed  the  advantages  of  the 
acceptance  to  the  seller  from  a  standpoint  of  liquidity  in  assets.  This 
advantage  is  further  extended  in  the  judgment  of  the  seller's  financial 
standing.  Judging  the  financial  standing  of  any  seller  of  merchandise, 
the  bank  considers  accounts  receivable  as  worth  only  a  share  of  the 
amount  represented.  The  seller,  presenting  his  financial  statement  to 
his  bank,  will  be  regarded  in  a  more  favorable  light  if  he  is  a  user  of 
acceptances  than  if  he  conducts  his  business  on  the  basis  of  the  open 
account  or  on  single  name  paper,  as  acceptances  are  looked  upon  by 
banks  with  more  favor. 

ACCEPTANCES  ENABLE  SELLER  TO  OFFER  BANK  BET- 
TER COMMERCIAL  PAPER 

Trade  acceptances  are  regarded  by  the  Federal  Reserve  Board  as 
more  advantageous  for  banking  business  than  are  single  name  and 
other  commercial  paper.  Single  name  paper  is  not  as  preferable  to  the 
banker  as  the  trade  acceptance,  since  in  the  former,  one  party  is  liable, 
while  in  the  latter,  the  banker  may  have  recourse  to  two  parties  who 
are  jointly  liable.  For  this  reason,  banks  are  inclined  to  give  better 
rates  in  the  discount  of  trade  acceptances,  and  also,  because  of  the 
fact  that  they  themselves  are  allowed  better  rediscount  rates  by  the 
Federal  Reserve  Banks  in  the  discount  of  trade  acceptances. 

ACCEPTANCES  NO  INTERFERENCE  TO  SELLER  OR 

BUYER  IN  SALES 

When  a  deal  is  consummated  between  seller  and  buyer,  it  may  be 
that  certain  terms  have  been  arranged  upon  which  the  carrying  out 
of  the  contract  might  be  wholly  dependent.  The  seller  may  not  have 
arranged  to  receive  cash  payment  from  the  buyer  and  the  buyer  may 


Commercial  Banking  and  Credits  127 

not  be  able  to  pay  any  cash  for  his  purchases.  The  seller,  through 
the  acceptance,  is  enabled  to  assist  the  buyer  in  carrying  out  his 
original  intentions  without  the  latter  being  forced  to  pay,  as  the  burden 
of  financing  the  buyer  is  passed  along  to  the  bank. 

The  purpose  behind  the  establishment  of  a  discount  market  in  the 
United  States  is  to  collect  the  available  reserves  and  funds  of  the 
nation  to  be  loaned  out  and  used  in  the  process  of  absorbing  commer- 
cial paper  and  principally  acceptances.  It  is  through  this  last  men- 
tioned method  that  the  seller  may  avail  himself  of  the  use  of  the  funds 
which  the  bankers  are  able  to  collect,  for  the  benefit  of  the  buyer  as 
well  as  for  himself. 

ACCEPTANCE  ENABLES  SELLER  TO  ASSIST  CUSTOMERS 

BY  EXTENSION  OF  CREDIT  WITHOUT 

OBLIGATION   ON   FORMER 

Modern  day  transactions  are  based  entirely  upon  credit.  It  has 
been  estimated  that  ninety  per  cent,  of  the  country's  business  is  done 
upon  a  credit  business,  that  is,  by  the  giving  of  something  having  a 
present  value  for  a  promise  of  payment  in  the  future.  The  seller  is 
restricted  through  his  limited  capital  to  grant  any  too  great  an  amount 
of  credit  to  any  one  class  of  buyers.  Neither  does  the  seller  wish  to 
forego  the  opportunities  of  materializing  on  possible  sales. 

Furthermore,  the  buyer  is  equally  anxious  to  do  business  with  the 
seller,  if  he  can  procure  the  merchandise  on  a  credit  basis.  The 
acceptance,  therefore,  provides  a  means  whereby  the  buyer  may  take 
advantage  of  a  bargain  to  the  equal  advantage  of  the  seller — a  process 
which  can  be  carried  out  only  with  the  cooperation  of  the  banker,  who 
has  at  his  command  the  available  funds  which  may  be  used  for  this 
purpose. 

The  above  described  advantages  accruing  to  the  seller  from  the 
employment  of  the  acceptance  would  alone  be  worthy  of  the  time  and 
attention  of  business  men.  Not  only  in  the  above  way  is  the  accept- 
ance of  value,  for  the  benefits  which  may  flow  from  its  continued  use 
are  even  more  extensive  and  numerous  than  those  mentioned  above. 


CHAPTER  X 

THE  BANKER  AND  THE  TRADE  ACCEPTANCE 
The  Duty  of  the  Banker 

It  is  a  matter  of  common  knowledge  that  in  periods  of  great  prosperity, 
credits  are  apt  to  become  over  extended,  both  in  amounts  and  as 
to  length  of  time.  This  is  due  to  the  fact  that  in  times  of  prosperity, 
business  is  conducted  at  a  considerable  volume  of  profit.  Furthermore, 
business  men  lose  sight  of  the  fact  that  nearly  all  periods  of  prosperity 
are  sooner  or  later  followed  by  periods  of  business  depression.  The  re- 
sult is  aat  business  houses  find  themselves  with  their  business  and  profits 
greatly  reduced  and  their  credit  obligations  reaching  the  maximum. 

In  times  like  these  money  becomes  scarce,  as  a  result  of  which  accounts 
are  made  '  '  Ht  to  settle,  bringing  about  failures  in  business,  to  the  great 
loss  of  al'-  i.ifc'^ people  of  the  country. 

As  a  remedy  to  the  above  conditions,  the  trade  acceptance  method  is 
advocated,  to  the  end  that  it  will  eliminate  credit  over-extension  with  its 
accompanying  evils. 

It  is,  therefore,  to  the  banker  that  the  problem  of  improving  credit  con- 
ditions and  curtailing  over-extension  falls.  The  banker  is  especially  in- 
terested in  acceptances,  and  there  are  a  number  of  interesting  reasons  why 
the  average  banker  should  encourage  their  use. 

THE  ELEMENT  OF  RISK 

Without  question,  from  a  consideration  of  the  previous  discussions  of 
the  trade  acceptance,  and  from  the  standpoint  of  both  the  buyer  and 
seller,  the  banker  gains  a  great  advantage  from  this  class  of  commercial 
or  two  name  paper,  for  it  gives  him  a  better  opportunity  of  measuring 
risks  than  under  the  open  book  account  system.  Under  the  open  account 
method,  the  best  that  could  be  done  was  to  estimate  the  risk.  Under  the 
trade  acceptance  method  the  risk  can  be  actually  measured. 

HIGHER  COMMERCIAL  STANDING  OF  ACCEPTANCES 

When  a  depositor  seeks  to  borrow  money  on  single  name  paper  as 
security,  the  banker  is  never  sure  as  to  the  purpose  of  its  origin.     The 

128 


Commercial  Banking  and  Credits  129 

borrower  may  desire  the  funds  for  the  purpose  of  using  them  in  the 
general  conduct  of  his  business,  but  the  banker  knows  nothing  about  the 
actual  transaction  against  which  he  is  extending  credit. 

The  banker  knows  that  the  trade  acceptance  represents  a  current  trans- 
action. It  shows  on  its  face  the  reason  why  the  credit  is  extended.  The 
trade  acceptance  arises  from  a  merchandise  transaction  and  is  backed  up 
by  the  merchandise  which  it  covers  as  security  for  its  payment.  The  trade 
acceptance  is  consequently  of  a  higher  commercial  standing  than  single 
name  paper  or  paper  with  no  uniformity  of  purpose  in  its  origin,  as 
commercial  paper  used  by  the  Government  banks  for  the  issuance  of  bank 
notes  it  acts  as  a  form  of  special  currency. 

ACCEPTANCE  REQUIRES  LESS  CREDIT  RE-EXTENSION 

Borrowers  very  frequently  seek  to  have  their  bankers  extend  the  time 
within  which  to  meet  their  single  name  notes.  Frequently,  they  are  obliged 
to  make  new  loans  in  order  that  they  may  be  enabled  to  talc  laturing 

notes.  In  this  connection,  a  general  refunding  process  is  n*..  .  ry.  The 
banker,  moreover,  in  discounting  single  name  paper,  takes  it  for  granted 
that  he  may  sooner  or  later  be  called  upon  to  extend  the  date  of  maturity. 

In  the  discount  of  trade  acceptances,  however,  the  banker  knows  that 
the  particular  transaction  is  segregated  from  the  borrower's  general  busi- 
ness, and  that  the  obligation  arises  from  a  tangible  nature.  He  knows 
furthermore  that  it  will  be  actually  liquidated  at  a  definite  date.  He 
knows  also  that  the  trade  acceptance  may  only  arise  from  transactions 
involving  the  sale  of  merchandise,  and  there  is  something  of  a  tangible 
nature  from  which  the  obligation  can  be  met. 

SELF  LIQUIDITY  OF  TRADE  ACCEPTANCES 

The  banker,  in  lending  money  on  single  name  paper  has  no  concrete  idea 
as  to  where  the  depositor  is  going  to  get  the  money  to  meet  the  note  when 
due. 

In  the  discount  of  trade  acceptances,  he  knows  that  certain  goods  have 
been  shipped  to  the  acceptor  and  that  through  the  sale  of  these  goods  dur- 
ing the  period  that  the  trade  acceptance  is  outstanding,  the  acceptor  ex- 
pects to  get  the  money  with  which  to  meet  the  trade  acceptance  at  maturity. 

REDISCOUNT  PRIVILIGES  OF  THE  BANKER 

Under  the  provisions  of  the  Federal  Reserve  Act,  the  banker  is  privileg- 
ed to  rediscount  trade  acceptance  with  the  Federal  Reserve  Bank  of  his 
district.    Dealings  in  trade  acceptances  and  their  use  are  highly  encourag- 


i3o  Bank  and  Trade  Acceptances 

ed  by  the  Federal  Reserve  Board  as  well  as  by  the  various  Federal  Reserve 
Banks,  and  preferential  rates  are  granted  for  their  rediscount. 
Trade  acceptances  have  been  taken  from  the  mass  of  general  commercial 
paper  and  have  been  placed  in  a  cl^ss  by  themselves.  Their  credit  stand- 
ing is  much  higher  than  other  forms  of  commercial  paper,  and  they  com- 
mand a  better  rate  of  discount  than  single  name  commercial  paper.  The 
margin  of  profit  in  the  process  of  rediscounting  trade  acceptances  is  to 
the  advantage  of  the  banker  also,  for  he  is  enabled,  generally,  to  take  ad- 
vantage of  the  leeway  in  rediscount  rates  which  are  generally  a  fraction  of 
a  percent  lower  than  the  discount  rate  charged  by  the  bank  to  the  custom- 
ers. 

The  creation  and  development  of  discount  companies  in  the  United 
States  is  progressing  at  a  rapid  rate,  and  the  time  is  doubtlessly  not  far 
distant  when  these  discount  companies  will  be  able  to  render  a  very  im- 
portant service  to  banks  and  bankers.  Discount  companies  prefer  trade 
acceptances  to  single  name  paper  and  would  much  sooner  purchase  them 
from  bankers  than  they  would  any  other  class  of  commercial  credit  instru- 
ments. Such  discount  companies  would  also  doubtlessly  ofifer  more  favor- 
able rediscount  terms  than  the  Federal  Reserve  Banks,  being  especially 
organized  for  the  particular  purpose  of  commercial  paper  and  acceptance 
dealings. 

LIMITATIONS  AS  TO  DISCOUNT  OF  COMMERCIAL  PAPER 
FOR  ANY  ONE  PARTY  NOT  APPLICABLE  TO  TRADE 

ACCEPTANCES 

Banks  are  generally  restricted  from  lending  to  any  one  individual,  per- 
son, firm  or  corporation  in  an  amount  in  excess  of  ten  percent  of  their 
capital  and  surplus,  either  upon  promissory  notes  or  single  name  paper, 
even  when  such  security  is  of  the  best  sort.  This  has  proven  to  be  a 
wise  legal  provision  and  has  prevented  many  over-extensions  of  credit. 

However,  there  have  been  occasional  instances  where  people  who  have 
been  entirely  worthy  of  additional  credit  for  seasonal  requirements,  have 
been  unable  to  obtain  the  same  from  their  bank,  and  consequently,  the 
bank  in  some  cases  has  lost  a  good  part  of  the  business  of  one  of  its  most 
valuable  customers. 

The  above  restrictions  are  not  imposed  upon  banks  in  the  discount  of 
trade  acceptances.  The  bank,  therefore,  may  discount  for  its  customers 
their  acceptances  in  excess  of  the  ten  percent  limit.  Customers,  the 
credit  of  which  are  good,  may  then  be  taken  care  of  by  the  bank  in  the 
proper  way. 


Commercial  Banking  and  Credits  131 

ASSISTANCE  TO  BANKS  IN  CREDIT  MATTERS 

Trade  acceptances  necessitate  collections  upon  maturity,  which  work 
is  invariably  done  by  banks.  Where  they  are  generally  used,  bankers  are 
in  a  position  to  keep  in  very  close  touch  with  local  credit  conditions,  and 
have  an  opportunity  to  observe  which  of  the  local  people  pay  their  ac- 
ceptances promptly  and  satisfactorily,  and  which  of  the  local  people  meet 
their  obligations  in  an  unsatisfactory  way.  At  the  present  time  the  local 
banker  has  only  a  general  idea  as  to  how  various  peoples  in  the  com- 
munity settle  their  open  accounts.  Under  the  acceptance  system,  he  will 
know  definitely  the  credit  standing  of  the  various  people  of  the  com- 
munity in  a  more  certain  way. 

PREVENTION  OF  ASSIGNMENT  OF  BOOK  ACCOUNTS 

It  frequently  happens  that  open  book  accounts  are  secretly  assigned, 
the  knowledge  of  which  might  remain  unknown  to  the  banker.  Such 
assignments  of  accounts  are  sometimes  made  by  very  reputable  people 
in  order  to  overcome  real  disadvantages  existing  in  our  present  system 
of  extending  credit.  The  assignment  of  accounts  is  a  menace  to  sound 
credit  conditions,  as  one's  assets  may  be  transferred  without  the  knowl- 
edge of  those  whose  interest  it  is  to  know  it. 

The  holder  of  acceptances  will  be  able  to  realize  upon  them  at  short 
notice,  instead  of  being  forced  to  either  wait  until  the  accounts  mature  or 
to  loan  thereon,  at  greater  cost. 

The  trade  acceptance  would  overcome  in  a  legitimate  manner  all  such 
disadvantages  for  it  would  eliminate  the  practice  of  secret  assignment  of 
accounts. 

ASSISTANCE  IN  JUDGING  CUSTOMERS 

In  the  discount  of  trade  acceptances  by  a  depositor,  the  banker  is  able 
to  learn  which  of  his  customers  arc  desirable  and  which  are  unsafe  or 
dangerous.  Trade  acceptances  enable  the  banker  to  judge  his  depositors' 
customers  as  either  comprising  a  good  or  bad  class.  The  advice  of  the 
banker  would  doubtlessly  lead  the  depositor  to  concentrate  his  eflforts 
on  the  good  customer  and  discontinue  business  with  such  as  the  banker 
might  suggest  were  unsafe.  This  will  tend  to  eliminate  losses  on  the 
part  of  the  depositor. 

In  judging  the  basis  for  credit  of  a  particular  party  or  firm,  bankers 


132  Bank  and  Trade  Acceptances 

generally  expect  that  the  total  bills  and  accounts  payable  will  not  exceed 
fifty  percent  of  its  quick  assets,  consisting  of  cash,  accounts  receivable  and 
inventory.  It  is  believed  by  some  bankers  that  the  introduction  of  the 
trade  acceptance  would  interfere  with  this  so-called  fifty  percent  rule, 
as  a  bank  would  then  be  called  upon  to  continue  the  process  of  discount- 
ing for  any  one  customer  for  the  full  value  of  the  acceptance,  in  other 
words,  treating  the  acceptance  as  the  equivalent  of  quick  assets. 

In  European  countries,  where  the  acceptance  method  is  most  developed, 
bankers  make  a  distinction  in  extending  credit  on  acceptances  and  on  open 
accounts.  They  allow  the  depositors  two  lines  of  credit,  one  against  trade 
acceptances,  and  the  other  based  on  inventories.  The  banker  examines 
the  trade  acceptances  offered,  and  if  he  finds  them  of  a  high-class  nature, 
extends  a  liberal  line  of  credit.  The  banker  then  carefully  considers  the 
exact  nature  of  the  inventory  and  its  status  with  respect  to  existing  liabili- 
ties and  grants  a  line  of  credit  based  on  the  inventory,  depending  upon 
whether  the  products  are  staple  or  not  readily  saleable. 

Foreign  bankers  claim  that  this  is  a  more  scientific  way  of  extending 
credit  than  our  method  of  merely  granting  fifty  percent,  and  furthermore, 
it  is  pointed  out  by  these  foreign  bankers,  that  they  loan  money  on  two 
specific  items  in  their  depositor's  statement.  First,  they  discount  the  trade 
acceptances,  which  represent  the  best  form  of  accounts  receivable,  and 
second,  they  loan  money  on  the  depositor's  inventory  considered  in  re- 
lation to  the  depositor's  liabilities.  Under  this  system,  the  money  ad- 
vanced by  the  banker  is  very  seldom  used  for  the  purchase  of  machinery, 
extension  of  buildings  and  for  acquiring  other  fixed  assets,  as  is  some- 
times the  case  under  our  system  where  the  banker  does  not  make  such 
close  inquiry  as  to  just  what  the  money  is  to  be  used  for.  Credit  ex- 
tended on  trade  acceptances  is  based  upon  money  due  to  the  depositor, 
while  straight  bank  loans  are  based  upon  inventories. 

THE  ACCEPTANCE  AS  A  BASIS  OF  A  LIQUID  CURRENCY 

It  is  to  the  bankers'  great  advantage  that  credit  conditions  always  remain 
sound  throughout  the  country,  as  this  is  the  basis  for  sound  finance.  In 
our  system  of  note-issues  by  the  Federal  Reserve  Banks,  the  security  is  of 
two  classes,  the  first  being  gold,  and  the  second  commercial  paper  of 
recognized  standing.  On  account  of  their  high  commercial  character 
acceptances  are  included  in  the  class  of  commercial  paper  taken  as  security 
for  note-issues.  The  banker  is  consequently  able  to  use  his  acceptances  to 
obtain  Federal  Reserve  Notes.     In  other  words,  acceptances  are  as  good 


Commercial  Banking  and  Credits  133 

as  cash  to  the  banker.  It  would,  therefore,  seem  that  every  banker  should 
be  interested  in  constantly  improving  the  quality  of  commercial  paper 
used  as  a  basis  for  the  issuance  of  these  notes. 

ACCEPTANCE  CREATES   MORE  BUSINESS   FOR  BANKS 

It  is  doubtlessly  true  that  trade  acceptances  would  create  a  larger  volume 
of  bankable  paper  and  as  a  result  a  larger  volume  of  business  for  the 
banker.  Businessmen  would  allow  more  of  their  transactions  to  pass 
through  the  bank,  such  as  collections,  discounts,  rediscounts,  affording  a 
better  means  of  employing  their  funds,  and  a  consequent  benefit  of  wider 
banking  activity. 

ACCEPTANCE   BENEFITS    LOCAL    COMMUNITY   WHEREBY 
BANK  IS  DIRECTLY  BENEFITED 

Local  manufacturers  and  jobbers  have  experienced  at  times  great  diffi- 
culty in  the  course  of  their  business,  either  through  inability  to  secure 
sufficient  working  capital  or  in  the  high  rates  of  interest  exacted  by  the 
local  banks.  The  use  of  trade  acceptances  will  enable  the  banks  to  employ 
their  resources  safely  and  will  permit  them  to  encourage  the  local  manu- 
facturers and  jobbers  in  the  safe  and  reasonable  expansion  of  their  busi- 
ness, thus  aiding  in  the  economic  and  business  development  of  their  lo- 
cality. The  banker  moreover  will  be  more  inclined  to  discount  trade 
acceptances  bearing  at  least  two  names,  in  preference  to  single  name  paper, 
and  will  generally  allow  a  lower  rate  for  discounting  than  on  other  classes 
of  commercial  paper.  In  this  way  a  more  regular  system  of  earnings 
with  less  loss  may  be  established  to  the  benefit  of  the  banker. 

THE  ACCEPTANCE  ACTS  AS  AN  ECONOMIZER  OF  TIME  AND 

EXPENSE 

It  has  been  stated  by  a  number  of  people  questioning  the  acceptance  as 
a  saver  of  time  and  lost  motion,  that  bookkeeping  would  be  greatly  in- 
creased by  the  use  of  acceptances.  This  is  not  so,  for  the  banker  himself 
knows  that  the  amount  of  work  involved  in  the  clearing  of  checks  could 
not  be  increased  through  the  handling  of  trade  acceptances.  Furthermore, 
two  name  papers,  because  of  its  better  security,  will  reduce  losses  to  the 
bank. 


1-34 


Bank  and  Trade  Acceptances 


THE  BANKER  CONSIDERED  FROM  THE  STANDPOINT  OF 
INVESTMENTS  IN  ACCEPTANCES 

As  an  investment,  the  banker  is  benefited  both  directly  and  indirectly. 
He  is  able  to  utilize  his  spare  funds,  thereby  making  them  productive.  He 
is  able  to  obtain  short  loans  from  the  Federal  Reserve  Bank  of  his  district 
on  his  own  acceptances  while  not  being  required  to  rediscount  them.  He 
is  able  to  deal  with  banks  and  brokers  direct  in  the  distribution  of  com- 
mercial paper,  to  his  benefit. 


CHAPTER  XI 

THE  CONSUMER,  THE  RETAILER  AND  THE  TRADE 

ACCEPTANCE 

The  Financing  of  Time  Payment  Sales 

In  recent  years,  there  has  been  developed  a  system  of  financing  especially 
designed  to  assist  the  retailer  and  principally  the  consumer  in  time  pay- 
ment sales. 

This  is  accomplished  by  means  of  the  so-called  retail  trade  ac- 
ceptance. In  some  lines  of  retailing,  where  the  sale  amounts  to  more 
than  the  average  sum,  and  beyond  the  immediate  means  of  the  consumer, 
the  merchant  sooner  or  later  finds  that  he  can  carry  on  many  more  times 
the  amount  of  business  conducted  by  him  if  he  could  extend  credit,  instead 
of  sell  on  a  basis  of  cash-payments.  Unfortunately,  the  majority  of  con- 
sumers, in  making  purchases  of  high  priced  articles,  are  not  disposed, 
nor  have  they  the  means,  to  pay  cash  beforehand.  They  vi'ould  rather 
make  periodical  settlements.  The  merchant,  however,  cannot  afford  to  sell 
numerous  consumers  on  open  account  as  he  would  soon  find  himself 
limited  in  his  activities. 

PRACTICAL  WORKING  OF  THE  PLAN 

The  practical  working  of  the  "retail  trade  acceptance"  method  of  financ- 
ing time  payment  sales  is  as  follows :  Let  us  suppose  that  a  manufacturer 
or  dealer  desires  to  sell  his  products  to  the  consumer,  direct.  The  products 
above  referred  to  may  be  articles  of  household  utility. 

First,  the  manufacturer  or  dealer,  after  completing  arrangements  with 
the  so-called  "acceptance  corporation"  or  the  "commercial  bank"  operating 
the  plan,  instructs  his  salesmen  and  clerks  in  all  the  details  of  the  opera- 
tions. Folders  and  other  literature  for  their  instruction,  also  advertising 
for  the  public,  are  then  prepared  for  publicity  purposes  so  that  all  factors 
in  the  transaction  will  understand  it  clearly. 

The  next  step  is  for  each  dealer  who  desires  to  avail  himself  of  the 
plan  to  get  in  touch  with  the  so-called  "acceptance  corporation"  or  the 
"commercial  bank." 

135 


136  Bank  and  Trade  Acceptances 

The  dealer  is  required  to  give  to  the  bank  or  to  the  "acceptance  cor- 
poration" a  financial  statement,  upon  which  basis  he  is  granted  a  certain 
line  of  credit,  which  means  that  he  can  turn  over  acceptances  to  the  bank 
or  to  the  acceptance  corporation  until  he  has  reached  the  maximum  es- 
tablished for  him.  These  details  being  settled  and  the  contract  signed, 
the  dealer  is  furnished  with  all  the  necessary  blanks  and  forms.  The 
forms  consist  of  a  "retail  trade  acceptance"  and  a  "conditional  sale  agree- 
ment," which,  upon  having  the  signature  of  the  consumer,  or  purchaser 
affixed  thereto,  evidences  a  lien  on  the  goods  sold,  title  to  which  does  not 
pass  to  the  purchaser-consumer  until  the  entire  amount  of  the  acceptance 
is  paid  by  him. 

The  dealer  is  then  prepared  to  handle  his  time-payment  or  credit  ac- 
counts on  this  plan.  Dealers  usually  embody  a  statement  to  this  effect 
in  their  advertising  or  by  suitable  signs.  An  example  illustrating  the 
operation  of  the  plan  follows : 

Assume  that  a  customer  wants  to  purchase  an  article  from  a  dealer  and 
pay  for  it  in  deferred  payments,  extending  over  a  period  of  one  year. 
We  will  assume  that  the  article  sells  for  $150  and  that  the  dealer  requires 
20%  down.  In  addition  to  the  $30  cash  payment,  the  customer  is  required 
to  pay  at  the  same  time,  6%  discount  on  the  $120  trade  acceptance,  which 
represents  his  obligation,  and  1%  of  the  selling  price  of  the  article,  or 
$1.50,  as  fire  insurance  for  one  year  for  the  article  purchased.  The  dealer 
is  required  to  pay  a  service  fee  of  2%  of  the  face  value  of  the  acceptance 
or  $2.40  to  the  acceptance  corporation. 

The  transaction  works  out  in  figures,  thus: 

Selling  price  of  article $1 50-00 

Payment  down  20% 30.00 

Balance    $120.00 

Customer  gives  his  trade  acceptance  for  $120. 
The  customer  has  twelve  months  within  which  to  pay  the  sum  of 
$120,  that  is  $10  per  month. 

The  customer  pays  in  cash $30.00 

Six  per  cent,  discount  on  the  $120  trade  acceptance  for  twelve 

months    7-20 

Insurance,  i  %  of  selling  price i .50 

Total  cash  paid  by  customer $3870 


Commercial  Banking  and  Credits  137 

Dealer  receives  from  customer  as  above $38.70 

From  the  acceptance  corporation  or  the  bank,  the  face  value  of  the 
trade  acceptance,  $120,  less  discount  $7.20,  and  insurance 
$1.50;  or  $8.70 111.30 

Total    $150.00 

Dealer  pays  2%  of  acceptance  as  service  fee 2.40 

Dealer  receives  net $147.60 

From  the  above,  it  will  be  noted  that  the  dealer  receives  $147.60  for  the 
article,  which  is  $2.40  less  than  the  cash  selling  price,  the  difference  rep- 
resenting the  bank's  charge  to  the  dealer  for  the  service.  Through  this 
arrangement  the  dealer  obtains  cash  for  the  sale  of  the  article  and  he 
steps  out  of  the  transaction  at  once. 

Should  the  customer  fail  to  pay,  the  dealer  is  contingently  liable.  The 
dealer,  therefore,  is  required  as  a  matter  of  protection,  to  investigate  his 
customer's  credit  before  making  a  sale  of  a  product,  or  he  may  request 
the  bank  sponsoring  the  plan  to  do  it. 

The  dealer  requires  the  customer  to  sign  the  conditional  sale  agreement 
which  is  attached  to  the  trade  acceptance.  He,  then  draws  the  trade  ac- 
ceptance for  $120  on  his  customer,  and  his  customer  accepts  it  by  writing 
his  name  across  its  face. 

Thereupon,  the  dealer  indorses  the  trade  acceptance  and  takes  or  sends 
it  to  the  bank  or  to  the  "acceptance  corporation"  with  which  he  deals, 
in  exchange  for  which  he  is  paid  the  face  value  of  the  acceptance,  less  the 
charges  as  aforesaid. 

Subsequently,  the  "acceptance  corporation"  or  the  bank  sends  a  letter 
to  the  customer  giving  the  details  of  the  transaction  in  order  that  the 
customer  may  check  it  up,  and  at  the  same  time  the  bank  encloses  a  coupon 
book  which  must  be  used  in  making  payments  at  the  bank.  The  days  of 
the  month  on  which  payments  are  to  be  made  are  stated  clearly  in  the 
coupon  book,  and  the  customer  is  required  to  make  his  payments  as  they 
fall  due  monthly,  at  the  bank  of  "acceptance  corporation,"  or  through 
special  arrangements,  payments  may  be  received  by  the  dealer  to  be  turned 
over  immediately  to  the  bank. 

MANUFACTURER  OR  DEALER  CONSIDERED 

This  is  only  one  of  many  ways  in  which  the  acceptance  may  be  em- 
ployed.    However  looked  upon,  whether  it  benefits  most  the  manufac- 


138  Bank  and  Trade  Acceptances 

turer,  or  the  dealer,  the  consumer,  or  the  bank,  is  a  matter  of  opinion. 
It  might  be  said,  however,  that  as  regards  the  manufacturer  or  dealer, 
the  retail  trade  acceptance  permits  the  marketing  of  their  products  with- 
out tieing  up  their  capital,  and  in  this  way,  they  are  able  to  lower  the  price 
of  the  merchandise,  at  the  same  time  being  enabled  to  increase  their  sales. 
They  have  little  to  lose  by  the  operation  of  the  plan.  They  receive  money 
for  the  sale  immediately,  whereas  the  consumer  is  not  required  to  pay 
for  the  same  in  full  until  a  much  later  date. 

THE  BANK  OR  ACCEPTANCE  CORPORATION  CONSIDERED 

The  advantage  to  the  bank  or  "acceptance  corporation"  handling  the 
transaction  may  be  judged  from  the  example  above  given.  The  only 
element  of  risk  involved  lies  in  the  credit  ability  of  the  dealer  or  manu- 
facturer, but  as  this  is  investigated  beforehand,  the  bank  enters  into  the 
transaction  with  assurance  that  its  client  is  reasonably  able  to  back  up  the 
risk.  The  transaction  is  a  profitable  one  for  it  and  the  fields  for  develop- 
ment are  unlimited.  The  total  charges  paid  above  the  discount  amount 
are  moderate,  considering  the  convenience  the  plan  affords  to  the  dealer 
and  customer. 

CUSTOMER  CONSIDERED 

As  to  the  customer,  it  might  be  said  that  the  advantage  he  gains 
is  immediate  possession  of  the  merchandise  without  having  to  pay 
the  purchase  price  at  once,  while  the  charges  upon  a  percentage  basis  are 
very  low  when  considered  quantitatively.  And,  it  must  be  considered  that 
the  consumer  has  one  year's  time  within  which  to  settle  entirely.  The 
discount  of  six  percent  for  the  period  of  one  year  is  deducted  before- 
hand. The  extra  charge  of  one  percent  is,  therefore,  the  only  one,  which 
may  be  regarded  as  reasonable  for  the  convenience  which  the  plan  affords. 


CHAPTER  XII 

MISCELLANEOUS  POINTS  OF  ADVANTAGE  TO  USERS  OF 
THE  TRADE  ACCEPTANCE  PLAN 

Credit  Investigation  Always  Necessary 

Credit  of  Parties  to  the  Bill  Should  Always  be  Investigated 

Proper  investigation  of  the  credit  standing  of  the  parties  to  the  ac- 
ceptance is  just  as  necessary  in  the  acceptance  method  as  when 
goods  are  sold  on  open  account.  The  responsibility  of  the  ac- 
ceptor as  well  as  of  the  drawer  should  always  be  ascertained.  In 
discounting  trade  acceptances  for  their  customers,  banks  may  suit 
themselves  as  to  the  requirement  of  a  statement  from  the  acceptor.  How- 
ever, in  the  case  of  an  unusual  amount  of  acceptances  being  discounted, 
the  bank  should  procure  sufficient  information  in  order  to  enable  it  to 
determine  whether  the  acceptor  is  of  good  moral  and  financial  standing 
and  whether  he  is  capable  of  meeting  his  obligations  upon  maturity. 

TRADE  ACCEPTANCES  INTENDED  FOR  CURRENT  TRANS- 
ACTIONS ONLY 

Trade  Acceptance  Should  Represent  Current  Transactions  Only 

The  trade  acceptance  has  a  specific  function  to  perform,  and  should  be 
used  for  one  purpose  only,  that  is,  as  a  negotiable  acknowledgment  of  an 
actual  sale  of  goods  from  a  seller  to  a  buyer.  It  covers  a  live  transaction, 
drawn  for  the  time  involved  in  the  terms  of  the  sale.  In  order  to  main- 
tain their  high  commercial  standing,  acceptances  should  not  be  used  for 
any  other  purpose  but  that  involving  present  merchandise  transactions. 
Overdue  accounts  should  not  give  rise  to  acceptances  in  any  event. 

RENEWALS  SHOULD  NOT  BE  ENCOURAGED 

Under  normal  conditions,  a  trade  acceptance  should  not  be  renewed, 
since  it  no  longer  represents  a  current  transaction.  Acceptances  should 
always  be  paid  at  maturity.     Instances  have  been  observed  where 

139 


140  Bank  and  Trade  Acceptances 

it  was  expected  that  a  trade  acceptance  would  be  renewed  from  time 
to  time  on  the  plea  that  sales  by  the  drawer  to  the  acceptor  were 
occurring  each  month,  aggregating  or  exceeding  the  amount  of  the  trade 
acceptance.  This  is  not  good  practice.  The  acceptance  should  be  drawn 
for  a  period  corresponding  to  the  sale,  and  wherever  possible,  for  the 
actual  amount  due  on  the  particular  sale,  or  accumulation  of  sales.  The 
exception  to  this  latter  statement  takes  place  when  it  is  necessary  to  issue 
acceptances  in  smaller  pieces  to  facilitate  their  discount. 

ACCEPTANCE  DOES  NOT  IMPLY  THE  GRANTING  OF 
LONGER  TERM  CREDITS 

The  giving  of  trade  acceptances  should  not  be  used  as  an  excuse  for 
obtaining  unreasonable  time  in  sales  terms.  Many  firms  desiring  to 
introduce  the  trade  acceptance  plan  in  financing  their  business  have 
adopted  the  plan  of  granting  additional  time  or  longer  term  credits  to 
their  customers.  While  many  firms  have  in  this  way  successfully  intro- 
duced the  acceptance,  others  believe  that  undue  inducements  in  the  form 
of  extension  of  time  and  of  discounts,  in  order  to  convert  accounts  into 
the  liquid  form  of  trade  acceptances,  will  tend  to  cheapen  the  calibre 
of  the  acceptance. 

ACCEPTANCE  SHOULD  BE  INTRODUCED  TO  ALL  ALIKE 

Many  concerns  have  adopted  the  acceptance  in  the  case  of  customers 
who  have  proved  themselves  to  be  slow  payers.  While  there  is  no  objec- 
tion to  this  method  itself,  still  if  the  concern  attempts  to  market  or  discount 
these  acceptances  and  makes  claim  to  a  preferential  rate  because  of  the 
two  name  self-liquidating  character  of  the  paper,  it  would  not  be  doing  the 
acceptance  method  full  justice  and  would  not  allow  the  full  benefits  which 
may  accrue  from  it. 

Moreover,  when  one  considers  that  the  trade  acceptance  method  serves 
to  show  the  bank  the  character  of  buyers  to  whom  the  borrower  is  selling, 
and  whether  or  not  these  buyers  pay  promptly,  the  bank  receiving  for 
discount  from  its  customer  acceptances  of  companies  of  inferior  credit 
standing  and  slow-paying  reputation  will  not  become  very  enthusiastic 
about  making  a  preferential  rate,  but  may  even  feel  like  revising  upward 
the  loaning  terms  to  that  customer.  A  company  which  uses  the  acceptance 
for  reforming  its  slow-paying  accounts  should  not  market  such  acceptances 
or  discount  them  as  first-class  paper  for  this  tends  to  cheapen  the  trade 
acceptance  movement. 


Commercial  Banking  and  Credits  141 

GUARDING  AGAINST  FRAUDULENT  ACCEPTANCES 

As  in  every  line  of  activity  the  good  are  mingled  with  the  bad,  so  in  the 
trade  acceptance  is  there  a  danger  of  fraudulent  commercial  paper  arising. 
Just  the  same  as  the  banks  have  to  contend  with  difficulties  arising  from 
fraudulent  drawings  of  checks,  in  the  same  way  is  it  possible  that  ac- 
ceptances representing  fictitious  transactions  should  be  created.  Banks 
should  exercise  great  precaution  and  should  extend  their  credit  watchful- 
ness by  every  possible  means  to  prevent  forgery  and  fictitiousness. 

PUBLICITY  IN  ACCEPTANCE  SHOULD  BE  EXTENDED 

LIBERALLY 

To  those  firms  which  seek  to  adopt  the  trade  acceptance  plan,  it  might 
be  said  that  publicity  from  the  start  with  full  explanation  and  education 
should  be  given  to  the  buyer  on  the  subject  of  the  trade  acceptance  and  its 
advantages  to  him.  No  arbitrary  action  should  be  forced  upon  the  buyer, 
but  on  the  other  hand,  a  general  outline  of  the  principles  of  the  acceptance 
method  should  at  all  times  be  the  means  of  inducing  the  buyer  to  adopt  it 
as  a  legitimate  means  of  financing  his  purchases. 


CHAPTER  XIII 
The  Legal  Phase  of  the  Acceptance 

It  has  frequently  been  asked  whether  a  trade  acceptance  payable  at 
a  certain  bank  operates  in  the  same  manner  as  does  a  check ;  that  is  to 
say,  if  a  trade  acceptance  is  presented  at  the  bank  where  it  is  made 
payable,  for  payment,  is  the  bank  obligated  in  the  same  way  as  it  is 
on  a  check  drawn  upon  it  by  one  of  its  depositors. 

Prior  to  the  enactment  of  the  Negotiable  Instruments  Law,  there 
was  a  conflict  of  opinion  in  the  different  States  on  this  point.  Where 
a  customer  made  his  note  payable  at  a  bank,  some  States,  as  New 
York  and  Pennsylvania,  held  that  it  was  equivalent  to  a  check.  In 
other  words,  the  acceptance  operated  as  an  order  upon  the  bank  to 
pay;  and  on  presentation  at  maturity,  it  was  paid  and  charged  up  in 
the  same  manner  as  a  check  would  be. 

Courts  in  other  States,  however,  held  that  it  was  not  equivalent  to 
an  order  to  pay,  and  that  a  note  payable  at  a  bank  simply  designated 
the  bank  as  the  place  of  payment,  and  the  bank,  as  the  customer's 
agent,  had  no  authority  by  reason  of  that  clause  in  the  note,  to  make 
payment  at  maturity  without  his  express  instructions.  Such  a  condi- 
tion exists  in  the  Negotiable  Instruments  Law  to-day  in  the  case  of 
instruments  presented  after  the  date  of  maturity,  when  it  becomes 
necessary  to  procure  the  express  instructions  of  the  maker  before 
payment  is  made  thereon. 

THE  NEGOTIABLE  INSTRUMENTS  LAW  AND  ITS  RELA- 
TION TO  THE  ACCEPTANCE 

The  Negotiable  Instruments  Law  which  has  been  enacted  in  every 
State  of  the  Union,  except  Georgia  and  Texas,  contains  a  provision 
which  clears  up  this  conflict  of  authority  by  the  enactment  of  the 
clause  which  provides  that  where  an  instrument  is  payable  at  a  bank, 
it  is  equivalent  to  an  order  to  the  bank  to  pay  for  the  account  of  the 
principal  debtor  thereof. 

143 


Commercial  Banking  and  Credits  143 

However,  in  four  or  five  States,  this  particular  section  is  eliminated, 
by  which  it  may  be  inferred  that  the  legislators  intended  not  to  have 
it  prevail.  Illinois,  Nebraska  and  South  Dakota  omit  this  section.  In 
Missouri,  by  an  amendment  made  in  1909,  an  addition  was  made  to 
the  end  of  the  section  as  follows:  "But  where  the  instrument  is  made 
payable  at  a  fixed  or  determinable  future  time,  the  order  of  the  bank 
is  limited  to  the  date  of  maturity  only."  That  addition  was  intended 
to  clear  up  the  question,  when  a  note  payable  at  a  bank  was  not  pre- 
sented on  the  precise  day  of  maturity,  whether  the  bank  had  authority 
to  make  payment  without  instructions  from  the  maker.  In  Minnesota, 
the  word  "not"  is  interpolated  so  as  to  read  "and  as  not  equivalent  to 
an  order."  In  Kansas,  however,  the  section  quoted  has  been  stricken 
from  the  law  by  a  subsequent  amendment.  In  other  words,  in  Illi- 
nois, Nebraska,  South  Dakota,  Minnesota  and  Kansas,  there  is  no 
authority  or  right  for  a  bank  to  charge  up  a  note  or  trade  acceptance 
which  is  made  payable  at  a  bank,  without  express  instructions  from 
the  acceptor.  In  all  other  States,  excepting  Texas  and  Georgia,  where 
the  Negotiable  Instruments  Law  is  not  in  force,  an  acceptance  made 
payable  at  a  certain  bank  is  equivalent  to  an  order  upon  that  bank  to 
pay. 

Acceptances  being  negotiable  instruments,  that  body  of  law  which 
governs  negotiable  commercial  paper  is  applicable  to  them.  (For 
Negotiable  Instruments  Law,  refer  to  Part  V). 


A  REVIEW  OF  PRACTICAL  QUESTIONS  AND  ANSWERS  ON 
THE  TRADE  ACCEPTANCE  METHOD 

(1)  Q.  What  is  meant  by  the  trade  acceptance  system? 

A.  By  the  trade  acceptance  system  is  meant  the  substitution  of  time 
drafts  drawn  by  the  seller  on  the  buyer  of  merchandise  at  the  time 
of  sale,  for  the  present  system  of  "open  book  accounts." 

(a)  Q.  What  is  a  trade  acceptance? 

A.  A  trade  acceptance  is  a  negotiable  certificate  of  indebtedness 
arising  out  of  a  current  transaction  in  merchandise,  having  a  certain 


144  Bank  and  Trade  Acceptances 

maturity,  drawn  by  a  seller  on  a  buyer,  for  a  fixed  or  determinable 
sum  of  money,  representing  the  purchase  price  of  goods.  A  trade 
acceptance  is  payable  to  order  and  bears  across  its  face  the  unqual- 
ified and  unconditional  acceptance  of  the  buyer. 

(3)  Q-  What  is  the  purpose  of  the  trade  acceptance? 

A.  The  primary  purpose  of  the  trade  acceptance  is  to  express  a 
credit  obligation  arising  from  the  sale  of  goods. 

(4)  Q.  What  is  the  general  advantage  of  the  trade  acceptance? 

A.  It  makes  possible  a  fuller  utilization  of  the  commercial  credit  of 
the  country  than  is  possible  under  existing  methods. 

(5)  Q.  What  is  the  distinction  between  the  trade  acceptance  and 
the  promissory  note? 

A.  The  trade  acceptance  is  confined  to  transactions  involving  the 
sale  of  goods.  The  promissory  note  may  cover  practically  any  kind 
of  obligation. 

(6)  Q.  What  is  the  distinction  between  the  trade  acceptance  and 
the  draft? 

A.  The  trade  acceptance  is  confined  to  credit  obligations  arising 
from  the  sale  of  goods  and  must  have  a  definite  maturity.  A  draft  may 
cover  various  kinds  of  transactions,  may  be  payable  on  demand  or  at 
sight  or  at  the  end  of  a  stated  time.  (For  forms  of  trade  acceptances 
in  use,  see  Part  IV). 

(7)  Q-  What  is  objectionable  to  the  "open  book  account"  system? 

A.  (a)  It  provides  an  easy  method  for  the  abuse  of  credit  by  buy- 
ers who  allow  their  accounts  to  remain  unpaid  for  unreasonable 
periods,  without  payment  of  interest. 

(b)  Assets  in  the  form  of  "book  accounts"  remain  illiquid,  and  are, 
therefore,  not  a  good  basis  for  credit. 

(c)  The  "open  book  account"  system  interferes  with  the  sale  of 
goods,  in  that  it  creates  the  possibility  of  an  argument  on  the  subject 
of  the  credit  period. 

(d)  It  unnessarily  ties  up  an  unreasonable  amount  of  the  value  of 
the  merchandise  involved. 


Commercial  Banking  and  Credits  145 

(e)  It  ties  up  the  seller's  capital  without  a  stated  compensation  to 
him. 

(f)  It  necessitates  costly  collections,  extensions  of  time  in  payment, 
trade  discounts  and  abuse  of  sales  terms. 

(g)  It  forces  the  seller  to  perform  a  banking-  function  for  the  buyer, 
(h)  It  tends  to  raise  prices,  this  being  the  only  way  in  which  the 

seller  can  protect  himself  against  the  burdens  forced  upon  him. 

(8)  Q.  Name  the  chief  objections  to  single  name  paper? 

A.  (a)  It  is  not  usually  as  strong  as  two  name  paper,  because,  in 
the  latter  case,  two  parties  instead  of  one  are  responsible. 

(b)  It  is  not  so  readily  negotiable  as  the  trade  acceptance  and  is 
not  conceded  so  favorable  a  rediscount  rate. 

(9)  Q.  What  are  the  disadvantages  of  "single  name"  paper  in  the 
hands  of  the  banker? 

A.  All  national  banks  and  many  State  banks  are  strictly  limited  by 
law  as  to  the  amount  of  loans  they  may  make  to  any  one  borrower. 
This  restriction  does  not  exist  in  the  case  of  the  discount  of  "two  name 
paper"  representing  a  current  business  transaction,  such  as  trade 
acceptances.  The  limitations  applied  to  single  name  paper  are  re- 
quired by  prudent  banking,  but  where  there  are  obligations  of  many 
different  buyers  with  the  indorsement  of  the  seller,  such  limitation  is 
not  essential  or  desirable. 

(9)  Q.  May  the  trade  acceptance  be  used  for  any  purpose  other 
than  to  express  a  credit  obligation  arising  from  the  sale  of  goods? 

A.  This  may  be  answered  in  the  negative. 

On  the  above  question,  authorities  are  in  substantial  agreement  that 
efforts  to  employ  the  trade  acceptance  for  any  other  purpose  is  certain 
to  cause  confusion  concerning  the  value  of  the  trade  acceptance. 

(10)  Q.  Describe  the  business  practice  involved  in  a  merchandise 
transaction  in  which  the  trade  acceptance  is  used. 

A.  First,  by  a  consummation  of  the  bargain  between  the  seller  and 
the  buyer  of  goods,  a  definite  amount  due,  with  a  definite  term  of  pay- 
ment is  agreed  upon. 

Second,  the  seller  then  draws  an  acceptance  on  the  buyer  and  pre- 
sents it  to  the  latter. 


146  Bank  and  Trade  Acceptances 

Third,  if  the  buyer  is  willing  to  assume  that  title  to  the  goods  has 
passed  to  him,  that  the  conditions  of  the  sale  have  been  complied  with 
and  that  the  drawing  of  the  acceptance  upon  him  is  in  proper  form, 
he  may  accept  by  writing  across  the  face  of  the  instrument  the  word 
"accepted,"  with  the  date,  place  of  payment  and  his  name  following, 
and  return  this  acceptance  to  the  seller  or  to  the  bank  presenting  it. 

Fourth,  the  seller  may  either  hold  the  acceptance  until  maturity  or 
may  arrange  to  have  it  negotiated.  The  seller  may  also  have  the  ac- 
ceptance discounted  with  a  bank,  thereby  obtaining  available  funds 
and  preventing  a  tie-up  of  his  capital. 

Fifth,  when  the  acceptance  matures,  the  acceptor  may  either  pay  it 
or  may  secure  an  extension  of  time.  This  may  be  accomplished  by 
treating  the  acceptance  as  a  past  due  obligation  and  covering  it  by  a 
promissory  note.  However,  in  cases  like  these,  a  prior  understanding 
on  the  part  of  both  buyer  and  seller  is  necessary. 

Sixth,  if  the  acceptance  has  been  discounted  at  a  bank,  the  bank  may 
have  the  acceptance  rediscounted  with  its  Federal  Reserve  Bank, 
thereby  being  assured  of  liquidity  in  its  investments. 

(11)  Q.  What  are  the  advantages  of  the  trade  acceptance  in  the 
hands  of  the  banker? 

A.  The  legitimate  acceptance  of  the  successful  dealer,  discounted  by 
the  seller  at  his  bank,  is  the  most  liquid  kind  of  paper  obtainable.  In 
the  event  of  any  sudden  withdrawal  of  deposits,  or  any  unforeseen 
stringency,  such  paper  in  the  hands  of  the  banker  is  immediately 
available  to  meet  such  withdrawals,  or  may  be  used  to  acquire  addi- 
tional loans  by  the  process  of  rediscounting. 

Single  name  paper,  however,  has  been  regarded  heretofore  as  un- 
desirable for  rediscount,  and  lending  banks  have  usually  required  the 
direct  obligations  of  borrowing  banks  which  the  latter  were  adverse 
to  giving,  since  the  appearance  of  "bills  payable"  in  a  bank's  state- 
ment has  for  a  long  time  been  looked  upon  by  the  public  as  elements 
of  weakness ;  the  lending  powers  of  banks  were  necessarily  limited,  by 
reason  of  the  necessity  of  holding  the  notes  of  their  borrowers  until 
paid. 

(la)  Q.  (a)  Why  should  a  seller  prefer  a  trade  acceptance,  instead 
of  a  note,  from  the  buyer? 


Commercial  Banking  AND  Credits  147 

(b)  Why  should  a  buyer  who  can  purchase  on  "open  book  account" 
on  liberal  terms  give  an  acceptance  ? 

A.  (a)  The  trade  acceptance  is,  on  its  face,  an  instrument  repre- 
senting a  particular  sale  of  goods,  and  an  absolute  acknowledgment 
of  the  correctness  of  the  seller's  claim  as  well  as  a  definite  promise  to 
pay  on  a  day  certain.  If  the  acceptance  bears  the  clause  prescribed 
by  the  Federal  Reserve  Board,  "The  obligation  of  the  acceptor  hereof 
arises  out  of  the  purchase  of  goods  from  the  drawer,"  it  is  prime  com- 
mercial paper  rediscountable  at  Federal  Reserve  Banks  at  a  lower 
rate  than  other  commercial  paper. 

Therefore,  every  seller  who  has  trade  acceptances  in  his  hands,  in- 
stead of  open  accounts  on  his  books,  puts  himself  in  a  position  to  be 
treated  more  liberally  by  his  bank,  and  secondly,  is  enabled  to  handle 
additional  business,  or  if  required,  to  "carry"  a  customer  who  is  tempo- 
rarily embarrassed,  or  to  tide  over  a  season  of  reduced  volume  of 
business. 

(b)  The  buyer  who  is  not  in  a  position  to  take  cash  discounts  will 
be  better  able  to  compete  with  the  cash  buyer. 

The  trade  acceptance,  showing  on  its  face  that  the  obligation  is  made 
for  a  purchase  of  goods,  the  transaction  establishes  rather  than  reflects 
on  the  acceptor's  credit. 

By  giving  a  negotiable  evidence  of  indebtedness  to  the  seller,  the 
buyer  shows  his  good  faith  and  by  meeting  his  obligations,  improves 
his  credit.  The  fact  that  with  every  purchase  he  makes  a  definite 
promise  to  pay  on  a  day  certain,  will  train  him  to  be  a  more  careful 
and  intelligent  buyer. 

(13)  Q.  How  may  a  seller  introduce  the  trade  acceptance  method? 
A.   (a)   By  making  a  conditional  sale,  that  is,  requiring  "trade  ac- 
ceptances" as  the  terms  of  sale. 

(b)  By  writing  an  explanatory  letter  and  following  it  up  by  a  trade 
acceptance. 

(c)  By  writing  a  short  explanatory  note  of  a  few  lines  on  a  perfo- 
rated section  above  or  below  the  acceptance,  explaining  its  operation. 

("For  publicity  on  the  acceptance  method,"  examine  forms  contained 
in  Part  IV). 

(14)  Q.  To  what  extent  may  the  acceptance  method  be  employed? 
A.  In  all  transactions  calling  for  credit  extension,  beginning  with 


148  Bank  and  Trade  Acceptances 

the  manufacturer  who  purchases  from  the  first  producer,  to  the  ulti- 
mate consumer  who  purchases  from  the  retailer. 

(15)  Q.  What  are  some  advantages  which  the  buyer  derives  from 
the  trade  acceptance  method? 

A.   (a)  It  develops  careful  buying  on  the  part  of  the  buyer. 

(b)  It  strengthens  his  credit  and  puts  him  in  the  position  of  a  pre- 
ferred buyer. 

(c)  It  develops  in  him  the  habit  of  prompt  payment  and  furnishes 
him  with  an  excellent  excuse  for  requiring  prompt  payment  from  his 
customers. 

(d)  It  enables  him  to  keep  better  tract  of  his  outstanding  obliga- 
tions, thereby  avoiding  the  evils  of  over-extension  of  credit. 

(e)  It  enables  him  to  realize  that  credit  is  as  tangible  as  cash  and 
should  be  regarded  and  used  accordingly. 

(f)  It  eliminates  wastage  and  lost  motion  attending  the  open  book 
account  method. 

(g)  It  releases  business  capital  for  new  transactions. 

(h)  It  improves  the  chances  of  the  buyer  of  small  means  to  operate 
in  successful  competition  with  the  larger  buyers. 

(i)  It  helps  the  buyer  by  making  him  deal  always  in  current  trans- 
actions, rather  than  in  long,  drawn  out  book  accounts. 

(j)  As  the  buyer  often  becomes  the  seller,  the  same  advantages  that 
apply  to  the  seller  apply  to  him. 

(k)  It  serves  as  a  tonic  to  the  business  organizations  concerned. 

(1)  It  prevents  the  accumulation  of  overdue  accounts,  and  above 
all,  develops  a  sounder  and  more  serious  attitude  towards  the  buyer's 
own  obligations,  which  is  indeed  of  most  benefit  to  him.  It  acts  there- 
fore, in  the  capacity  of  a  governor,  regulating  and  protecting  the  credit 
of  the  acceptor. 

(16)  Q.  What  are  the  advantages  which  the  seller  derives  from  the 
acceptance  method? 

A.  (a)  It  relieves  him  from  the  burden  of  financing  his  customers 
and  the  consequent  burdening  of  his  own  capital. 

(b)  It  enables  him  to  conduct  business  on  a  more  systematic  basis 
with  a  more  regular  income  schedule. 

(c)  It  puts  the  burden  of  proving  correctness  of  the  details  of  the 
pierchandise  transaction  where  it  belongs,  upon  the  buyer. 


Commercial  Banking  and  Credits  149 

(d)  It  provides  the  seller  with  a  liquid  asset. 

(e)  It  reduces  the  expenses  of  collection. 

(f)  It  simplifies  the  process  by  making  it  a  detail  in  banking  ma- 
chinery. 

(g)  It  promotes  the  economical  treatment  of  merchandise  and  en- 
ables the  seller  to  do  business  at  a  smaller  operating  cost. 

(h)  It  relieves  him  from  the  necessity  of  selling  his  accounts  at  a 
high  rate  of  interest  usually  exacted. 

(i)  It  enables  him  to  offer  the  bank  additional  security. 

(j)  It  strengthens  the  seller's  financial  statement  by  showing  the 
character  of  his  accounts. 

(k)  It  enables  the  seller  to  gauge  more  accurately  the  commercial 
standing  of  the  buyer, 

(1)  It  tends  to  confine  borrowing  to  funds  actually  needed. 

(m)  The  seller  inoffensively  assists  the  buyer  to  complete  his  con- 
tract in  the  way  in  which  he  originally  intended  to  complete  it. 

(n)  It  enables  the  seller  to  more  accurately  calculate  his  collections 
for  stated  periods. 

(o)  It  enables  the  seller  to  facilitate  his  customer's  business  by  the 
extension  of  credit  and  by  deliveries  in  a  way  not  always  possible 
under  the  open  account  system. 

(p)  It  gives  to  the  seller  two  name  paper  to  present  to  his  bank  for 
discount. 

(q)  It  enables  the  seller  effectively  to  dispose  of  the  possible  neces- 
sity of  subsequent  proof  of  the  legal  status  of  the  transaction  and  to 
exhibit  for  inspection  the  highest  possible  class  of  book  accounts. 

(17)  Q.  What  are  the  advantages  which  the  banker  derives  from 
the  trade  acceptance  method? 

A.   (a)   It  enables  the  banker  to  measure  his  risks  more  accurately. 

(b)  It  provides  the  banker  with  substantial  evidence  of  the  sound- 
ness of  the  stratum  of  credit  underlying  the  banking  business. 

(c)  It  increases  the  availability  of  assets. 

(d)  It  creates  a  secondary  reserve. 

(e)  It  enables  the  banker  to  borrow  more  easily  than  heretofore, 
because  the  trade  acceptance  can  be  so  easily  rediscounted  at  the  Fed- 
eral Reserve  Bank. 

(f)  It  increases  the  customers'  credit  and  borrowing  possibilities. 


150  Bank  and  Trade  Acceptances 

(g)  It  creates  better  commercial  paper  and  a  better  class  of  ac- 
counts. 

(h)  It  enables  the  bank  to  judge  whether  its  customers  and  its 
customers'  customers  are  following  sound  business  methods. 

(i)  It  increases  the  amount  of  bankable  paper  on  the  market  by 
directing  to  the  bank  financing  functions,  now  performed  by  manu- 
facturers, wholesalers,  jobbers  and  others. 

(i8)  Q.  What  are  the  advantages  of  the  trade  acceptance  system 
to  business  in  general? 

A.  (a)  It  improves  trade  relations  between  buyer  and  seller,  by 
clearly  defining  their  respective  obligations.  It  releases  funds  other- 
wise tied  up  in  open  book  accounts,  and  by  substituting  readily  com- 
mercial paper  for  non-negotiable  book  accounts,  it  makes  capital  more 
fluid. 

(b)  It  provides  a  check  against  carelessness  and  extravagance,  by 
reminding  the  debtor  constantly  that  his  credit  may  be  put  to  the  test. 

(c)  It  enables  invested  capital  to  do  considerably  more  than  its 
present  volume  of  work,  with  less  risk. 

(d)  It  lowers  borrowing  rates  because  of  the  production  of  standard 
paper  and  because  of  the  elimination  of  unnecessary  risks,  and  further, 
because  the  Federal  Reserve  Board  offers  preferential  discount  rates 
for  this  class  of  paper. 

(19)  Q.  What  are  some  of  the  evils  which  the  trade  acceptance 
would  remedy? 

A.  (a)  The  practice  of  taking  unearned  and  unauthorized  discounts, 
the  prevention  of  losses  by  bad  debts,  and  the  evils  attendant  upon  the 
carrying  of  overdue  accounts. 

(b)  The  prevention  of  secret  assignment  of  book  accounts. 

(c)  The  prevention  of  the  practice  of  canceling  orders  and  return- 
ing goods  without  sufficient  reason. 

(d)  The  prevention  of  overbuying  and  overselling. 

(20)  Q.  Does  the  trade  acceptance  eliminate  the  promissory  note? 

A.  No.  The  promissory  note  deals  with  all  kinds  of  business  trans- 
actions; the  trade  acceptance  with  current  merchandise  transactions 
only.  The  trade  acceptance  is  not  to  be  given  for  borrowed  money  or 
past  due  obligations. 


Commercial  Banking  and  Credits  151 

(21)  Q.  What  is  the  effect  of  trade  acceptances  upon  credit? 

A.  The  trade  acceptance  method  does  not  change  the  term  of  the 
credit — it  simply  carries  the  credit  in  better  form.  The  merchant 
whose  statements  show  "acceptances  payable"  and  "acceptances  receiv- 
able" should  be  entitled  to  a  higher  credit  rating  than  one  whose  state- 
ments show  "accounts  payable"  and  "accounts  receivable."  The 
merchant  who  brings  his  transaction  out  into  the  open  and  serves 
notice  upon  the  business  world  that  he  is  willing  to  meet  his  obliga- 
tions at  maturity,  is  a  better  business  risk,  and  hence,  entitled  to  better 
treatment  than  one  who  has  his  accounts  carried  upon  an  indefinite 
and  unbusiness  like  arrangement,  as  is  prevalent  in  the  open  account 
method. 

PROCEDURE 

(22)  Q.  Where  is  a  trade  acceptance  payable? 

A.  Ordinarily,  at  the  buyer's  bank,  or  at  some  other  place  mutually 
agreed  upon  at  the  time  of  its  issue. 

(23)  Q.  By  whom  is  the  trade  acceptance  presented  for  discount? 

A.  Ordinarily,  by  the  seller  of  merchandise. 

(24)  Q.  May  the  buyer  present  a  trade  acceptance  for  discount  in- 
stead of  the  seller? 

A.  Yes,  if  agreeable  to  the  seller,  and  if  there  is  a  reason  for  so 
doing.  This  is  frequently  done  when  it  is  possible  for  a  buyer  to  pro- 
cure a  better  discount  rate  from  his  bank  than  the  seller  could  secure 
from  his. 

(25)  Q,  Can  the  acceptance  be  legally  treated  as  a  check  chargeable 
against  the  buyer's  balance  at  his  bank  without  further  instructions  or 
authority? 

A.  This  may  be  answered  in  the  affirmative.  The  Negotiable  In- 
struments Act  provides  that  "Where  the  instrument  is  made  payable 
at  a  bank,  it  is  equivalent  to  an  order  to  the  bank  to  pay  the  same  for 
the  account  of  the  principal  debtor  thereon."  Express  authority  or 
instructions  from  the  bank's  depositor,  the  acceptor,  is  not  required 
in  the  opinion  of  some  authorities,  assuming  of  course,  that  the  ac- 
ceptor has  on  deposit  with  the  bank  sufficient  funds  for  the  purpose. 


152  Bank  and  Trade  Acceptances 

THE  FEDERAL  RESERVE  AND  ACCEPTANCES 

(27)  Q.  What  is  the  attitude  of  the  Federal  Reserve  Board  towards 
acceptances? 

A.  The  Federal  Reserve  Board  has  expressed  its  unqualified  ap- 
proval of  the  acceptance  method,  by  selecting  it  from  the  class  of  com- 
mercial paper  and  giving  to  it  a  regular  credit  standing.  It  has  seen 
fit  to  establish  preferential  discount  rates  to  encourage  their  use,  as 
it  believes  that  in  this  way  could  be  made  possible  the  maintenance  of 
a  highly  elastic  credit  system. 

(28)  Q.  What  are  the  advantages  offered  by  the  Federal  Reserve 
System  as  an  inducement  to  the  use  of  trade  acceptances  ? 

A.  (a)  The  system  offers  extensive  rediscount  facilities  with  pref- 
erential rates. 

(b)  The  banks  are  not  restricted  in  their  loans  and  purchases  of 
acceptances  as  in  the  case  of  single  name  paper,  to  any  one  person  or 
concern. 

(29)  Q.  What  is  eligibility,  and  what  are  the  requirements  of  eli- 
gibility as  applied  to  trade  acceptances? 

A.  By  eligibility  is  meant  the  quality  of  the  acceptance  which  the 
Federal  Reserve  Bank  will  rediscount.  In  order  that  an  acceptance 
should  be  eligible, 

1.  The  obligation  must  have  arisen  out  of  an  actual  commercial 
transaction,  domestic  or  foreign ; 

2.  It  must  have  a  maturity  at  the  time  of  purchase  of  not  more 
than  ninety  days,  exclusive  of  days  of  grace ; 

3.  It  must  be  indorsed  by  a  member  bank  or  supported  by  a 
satisfactory  statement  of  the  financial  condition  of  one  or  more 
of  the  parties  thereto. 

(30)  Q.  What  are  the  requirements  by  Federal  Reserve  banks  as  to 
evidence  of  eligibility? 

A.  (a)  The  acceptance  must  present  prima  facie  evidence  of  eligi- 
bility. 

(b)  It  must  bear  a  stamp,  or  certificate,  affixed  by  the  acceptor  or 
drawer  showing  that  it  is  a  trade  acceptance. 


CHAPTER  XIV 
Methods  of  Introducing  the  Acceptance 

Method  of  direct  appeal;  buyer  must  be  shown,  not  forced. — The 

Institute  has  received  many  letters  from  firms  engaged  in  nearly  all 
lines  of  business,  manufacturing,  wholesaling  and  retailing,  outlining 
the  methods  adopted  by  them  for  the  purpose  of  introducing  the  trade 
acceptance  in  their  business.  One  firm  which  has  resorted  very  largely 
to  the  trade  acceptance  method  of  financing  its  business,  writes: 

"The  most  successful  way  we  have  found  of  introducing  the  ac- 
ceptance method  among  our  customers  was  for  us  to  make  a  direct 
appeal  at  the  necessary  time  to  them,  as  for  instance,  upon  the  send- 
ing of  an  invoice  for  goods  sold,  and,  at  that  time  drawing  a  distinc- 
tion between  the  open  account  method  and  the  acceptance,  and  out- 
lining the  advantages  of  the  latter  to  them." 

The  following  letters  and  explanatory  matter  are  used  by  a  number 
of  large  houses  which  have  successtully  introduced  the  acceptance 
method. 

Extending  the  use  of  acceptances  through  salesmen. — The  principles 
of  the  acceptance  and  its  general  adaptability  to  any  business  requiring 
credit  extension  have  been  extended  by  a  number  of  firms  through 
salesmen  travelling  for  them.  Salesmen  are  generally  instructed  as  to 
the  necessary  procedure  and  are  given  full  advice  as  to  the  advantages 
of  the  acceptance  method  in  comparison  with  the  open  account. 

Undoubtedly,  personal  contact  with  the  customer  could  be  made  a 
most  desirable  form  of  introducing  the  acceptance.  The  salesman,  in 
negotiating  with  the  buyer,  first  po:  cs  out  the  advantages  of  the 
acceptance  to  the  latter,  and  then  ma  make  the  sale  and  granting  of 
credit  conditional  upon  the  buyer  gi\  g  his  written  acknowledgment 
of  his  indebtedness  in  the  form  of  a  tr.  le  acceptance.  If  the  buyer,  for 
some  reason  or  other,  should  declint  o  give  his  acceptance,  it  is  un- 
wise that  he  be  in  any  way  forced,  a:  experience  has  shown  that  time 
and  a  more  carefully  prepared  proj'  m  of  publicity  will  eventually 
make  him  see  the  merits  of  the  plan. 

153 


154  Bank  and  Trade  Acceptances 

Other  methods  used  by  some  commercial  firms  have  been  in  the 
form  of  publicity  through  house  organs  and  so-called  trade  and  mer- 
chandise circulars.  Therein  are  outlined  the  various  ways  of  settling 
for  merchandise,  and  the  general  utility  of  the  acceptance.  Ex- 
planatory letters  and  notes  attached  to  bills  and  statements  at  the 
time  they  are  sent  to  customers  have  also  been  productive  of  good 
results.  One  house  uses  the  plan  of  showing  the  saving  to  the  buyer 
by  giving  his  acceptance.  (See  Forms  Part  IV.)  It  is  assumed 
naturally  that  preferences  are  extended  to  those  buyers  consenting  to 
give  their  acceptance. 

Still  another  way  in  which  some  houses  have  succeeded  in  introduc- 
ing the  acceptance  has  been  to  bring  home  to  the  buyer  the  advantages 
of  the  method  to  him  through  plain  facts  and  figures  attractively 
stated.  The  one  contained  in  this  chapter  "Fair  Play  in  Business" 
and  similar  ones,  with  the  same  purpose  in  view,  are  also  used  by  a 
number  of  concerns  with  success. 

It  would  be  well  for  those  desiring  to  use  the  acceptance  method 
with  greater  success  to  consider  the  buyer  on  open  account  and  on 
the  acceptance  method.  Those  houses  which  have  adopted  the  plan  of 
financing  their  business  through  the  use  of  the  trade  acceptance  have 
generally  had  to  extend  some  consideration  to  the  buyer  willing  to 
give  his  acceptance  in  preference  to  the  one  desiring  the  open  account. 
As  the  seller  of  merchandise  is  benefited  greatly  in  using  the  ac- 
ceptance method  through  having  his  accounts  in  liquid  form,  he  could 
very  well  afford  to  give  a  better  consideration  to  his  buyer.  This  con- 
sideration may  be  in  the  form  of  a  larger  discount  than  allowed  buyers 
on  open  account.  Some  houses  prefer  to  give  more  consideration  to 
the  buyer  by  means  of  granting  him  a  longer  term  of  credit,  that  is, 
a  longer  time  within  which  to  meet  the  acceptance.  Other  houses  give 
a  credit  larger  in  amount  than  the  buyer  on  open  account  is  allowed, 
mainly  for  the  reason  that  accounts  are  thereby  kept  in  liquid  shape 
and  may  be  realized  upon  with  comparative  ease.  As  to  whether  the 
buyer  giving  acceptances  should  receive  merchandise  at  a  lower  figure 
than  those  purchasing  on  open  account  is  a  question  to  be  decided  by 
the  firm  from  the  nature  of  its  business  and  the  circumstances  which 
are  involved  in  their  sale. 

But  to  all  of  the  above,  it  might  be  said  that  the  giving  of  any 
consideration,  however  small,  is  still  unnecessary  on  the  part  of  the 
seller.  The  buyer  benefits  as  well  as  the  seller  and  it  is  to  the  ad- 
vantage of  both  to  favor  and  extend  the  plan. 


Commercial  Banking  and  Credits  155 

Publicity  Methods  in  the  Use  of  Acceptances 

Form  of  Slip  Attached  to  Trade  Acceptance  Forwarded  to  Buyer 

This  plan  of  attaching  an  explanatory  slip  to  the  acceptance  at  the 
time  it  is  sent  to  the  customer  has  proved  to  be  productive  of  good 
results. 

A  TRADE  ACCEPTANCE 

is  an  acknowledgment  of  a  debt  by  the  buyer  in  favor  of  the  seller, 
for  merchandise  that  the  seller  has  placed  in  the  hands  of  the  buyer. 
The  buyer  agrees,  in  writing  across  the  face  of  this  acceptance  his 
name,  the  name  and  location  of  his  own  bank  and  the  date,  to  pay 
the  amount  of  this  certain  indebtedness  at  a  certain  time  at  his  own 
bank. 

This  varies  from  the  open  book  account  method  only  in  giving  the 
debt  a  negotiable  value. 

According  to  a  FEDERAL  RESERVE  BANK  GOVERNOR'S 
OPINION,  the  signing  of  an  Acceptance  increases  the  financial 
standing  of  the  giver,  because  it  shows  prompt  paying  methods. 

Kindly,  sign  attached  Acceptance,  then  forward  to  us. 

Explanatory  letters  attached  to  trade  acceptances  by  some  firms, 
which  letters  are  detached  when  the  acceptances  are  signed.  (Sample 
of  attached  letter)  : 

By  recent  ruling  of  the  Federal  Reserve  Bank,  we  are  enabled 
through  the  medium  of  trade  acceptances  to  grant  the  special  terms 
you  requested  on  the  accompanying  invoice.  If  you  will  sign  and 
return  this  acceptance,  you  will  place  us  in  a  position  to  discount  this 
paper  at  our  bank,  placing  the  burden  of  carrying  the  account  on  them. 

This  varies  from  the  open  account  only  in  giving  the  bill  a  nego- 
tiable value  and  involves  absolutely  no  additional  obligation  on  your 
part. 

According  to  a  Federal  Bank  Governor's  Opinion,  the  signing  of  an 
acceptance  increases  the  financial  standing  of  the  giver,  because  it 
shows  prompt  paying  methods. 

If  you  prefer  to  take  advantage  of  the  2%  cash  discount,  you  may 
return  this  acceptance  unsigned,  with  your  check  within  thirty  days 
from  the  date  of  invoice.  Otherwise,  kindly  sign  the  attached  accep- 
tance, then  forward  to of 

Following  is  another  form  of  sample  letter  used  as  an  explanation 
of  the  acceptance  when  sending  invoice  and  acceptance  to  the  buyer. 


156  Bank  and  Trade  Acceptances 

TRADE  ACCEPTANCES  FOR  BETTER  BUSINESS 

The  Trade  Acceptance  is  a  negotiable  certificate  of  indebtedness 
arising  out  of  a  current  transaction  in  merchandise. 

The  Trade  Acceptance  covers  the  purchase  price  of  the  merchandise 
and  is  payable  at  a  stated  time  and  place. 

The  Trade  Acceptance  is  the  highest  type  of  commercial  paper.  It 
cannot  be  given  for  a  loan  or  past  due  account. 

The  Trade  Acceptance  stands  for  fair  exchange  between  buyer  and 
seller.  The  buyer  gives  a  negotiable  receipt  for  a  shipment  of  equal 
value. 

The  Trade  Acceptance  emphasizes  the  good  faith  of  the  acceptor. 
It  indicates  that  his  obligation  has  been  wisely  contracted  and  is  to 
be  met  when  due. 

The  Trade  Acceptance  is,  of  course,  understood  by  the  banker,  for 
he  knows  that  as  purchases  are  made  debts  are  incurred  and  that 
when  such  liabilities  are  shown  as  "Trade  Acceptances  Payable"  in- 
stead of  "Accounts  Payable,"  there  is  convincing  evidence  of  the  ac- 
ceptor's conservative  business  methods. 

We  offer  special  "Acceptance  Discounts"  to  customers  closing  their 
time  accounts  with  trade  acceptances. 

Another  Form  of  Explanatory  Letter  Used  with  Success. 

The  new  Federal  Reserve  Banking  Act  provides  for  discounting 
"trade  acceptances"  at  minimum  rates.  These  are  drafts  drawn  by 
seller  and  accepted  by  purchaser,  and  bearing  evidence  that  the  draft 
represents  an  actual  delivery  of  goods. 

All  other  great  nations  have  long  possessed  this  system,  the  lack  of 
which  has  been  a  prominent  cause  of  the  monetary  stringencies  which 
often  afflict  the  United  States,  and  now  that  our  government  has 
adopted  the  plan,  it  is  not  only  a  financial  advantage  but  a  civic  duty 
for  American  business  houses  to  forward  it. 

Taking  advantage,  for  our  mutual  benefit,  of  this  provision  of  the 
Federal  Reserve  Act,  we  are  able  to  offer  you,  instead  of  the  terms 
stated  on  the  enclosed  bill,  spec'al  terms  for  accepted  draft,  in  attached 
form. 

If  you  wish  to  avail  yours^'f  thereof,  please  accept  the  enclosed 
draft  by  signing  and  filling  in  *he  name  of  your  bank  in  the  spaces 
provided,  across  the  face  of  th'-  draft,  and  return  it  to  us  promptly  in 


Commercial  Banking  and  Credits 


157 


settlement  of  the  enclosed  invoice.     Otherwise,  terms  will  remain  as 
stated  on  the  face  of  the  invoice. 

To  conform  to  requirements,  this  acceptance  must  be  returned  im- 
mediately upon  receipt  of  invoice. 

FAIR  PLAY 

BETWEEN 

THE  BUYER    *Y*    THE  SELLER 


GIVES:— 

THE  SELLE)R  an  order  for  certain 
goods. 

THE  SELLER  a  promise  to  pay  ac- 
cording: to  terms  of  sale. 

THE  SELLER  an  opportunity  to  dis- 
pose  of  his  goods. 

HAS:— 

THE  SELLER'S  goods  In  his  place  of 
business. 

His  profit  from  the  sale  of  THE  SELL- 
ER'S goods. 

The  use  of  his  profit  and  of  THE 
SELLER'S    capital. 


GIVES:— 

THE  BUYER  the  goods  he  has  ordered. 
THE    BUYER    an    agreement    to    allow 

payment  on  terms  other  than  cash. 
THE  BUYER  an  opportunity  to  sell  hla 

goods  at  a  profit  to  himself. 

HAS:— 
The  account  entered  on  his  ledgers. 
His  capital  and  profit  tied  up   until  the 

expiration    of    credit    term. 
An  asset  which   is  not  available  in   Its 

present  form. 


IS  THIS  FAIR  PLAY? 

THE  TRADE  ACCEPTANCE  OFFERS 


THE  BUYER: 

The  means  of  assuring  himself  of  a 
continuous    source   of   supply. 

A  protection  against  financial  disturb- 
ances— attended  by  higher  prices. 

An  opportunity  to  open  and  close  an 
account  In  one  operation. 

The  means  of  keeping  closer  tab  on  his 
obligations  and  establishing  a 
broader   credit   standing. 


THE  SELLER: 

The  means  of  continuing  to  supply  the 
buyer's  needs  at  the  lowest  prices 
and    on   the   most    favorable    terms. 

A  protection  against  unforseen  diffi- 
culty in  financing  shipments  to  the 
buyer. 

The  opportunity  to  realize  on  his  ac- 
counts  at   minimum   expense. 

The  opportunity  to  devote  more  of  his 
time  and  attention  to  meeting  the 
buyer's   requirements. 

Quicker  Turnovers — Prompter  Pay — Surer  Profits 

The  trade  acceptance  is  made  out  in  accordance  with  regular  terms  of 
sale,  running  over  the  same  credit  period  and  for  the  same  amount  as 
the  invoice.  It  is  simply  a  negotiable  promise  to  do  exactly  as  the 
buyer  agreed  to  do  when  the  goods  were  ordered — every  buyer  should 
be  willing  to  back  his  word  with  his  signature. 


158 


Bank  and  Trade  Acceptances 


THE  TRADE  ACCEPTANCE  OFFERS  TO  BOTH  BUYER  AND 
SELLER  THE  MEANS  of  introducing  economy  and  efficiency  into 
business  and  its  use  will  place  this  Country  on  a  par  with  foreign 
countries  in  the  great  struggle  for  after-war  trade. 

METHODS  OF  A  BROOKLYN  BANK 

The  First  National  Bank  in  Brooklyn  is  effectively  promoting  the 
use  of  trade  acceptances  through  advertising.  An  advertisement  re- 
cently published  by  it  contained  an  illustration  of  the  trade  acceptance 
form,  and  pointed  out  that — 

"A  trade  acceptance  saves  the  transmission  of  cash  and  enables  the 
creditor  not  only  to  arrange  the  definite  date  of  payment  with  the 
debtor  but,  if  necessary,  to  secure  the  use  of  a  sum  practically  the 
equivalent  of  the  debt  long  before  that  debt  is  due  in  the  ordinary 
course  of  business." 

Through  the  advertisement,  the  bank  invited  further  inquiries  in 
response  to  which  its  vice-president,  William  S.  Irish,  sent  one  or 
more  letters,  these  presenting  not  only  an  explanation  of  what  trade 
acceptances  are  and  how  they  are  used,  but  a  strong  argument  for  their 
adoption  by  both  sellers  and  buyers. 

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A  trade  acceptance  saves  the  transmission  of  cash  and  enables  the 
creditor  not  only  to  arrange  the  definite  date  of  payment  with  the 


Commercial  Banking  and  Credits  159 

debtor,  but,  if  necessary,  to  secure  the  use  of  a  sum  practically  the 
equivalent  of  the  debt  long  before  the  debt  is  due  in  the  ordinary 
course  of  business. 

Ask  for  full  information  concerning  this  better  method  of  financing 
sales  of  merchandise. 

FIRST  NATIONAL  BANK  IN  BROOKLYN 
Broadway  and  Havemeyer  Streets 

Another  form  of  letter  used  by  the  same  bank  to  encourage  the  use 
of  acceptances : 

First  National  Bank 
In  Brooklyn 
Dear  Sir: — 

At  this  time  when  ever}''  dollar  of  cash  and  credit  counts  in  speeding 
up  production  the  trade  acceptance  makes  capital  more  eflfective. 

Many  of  our  customers  have  been  bringing  trade  acceptances  to  us 
for  discount  which  have  been  given  by  customers  of  theirs  in  pay- 
ment of  merchandise.  They  tell  us  that  they  find  this  method  very 
satisfactory  for  themselves  and  for  their  customers. 

We  believe  that  in  order  to  get  all  the  advantages  of  trade  accep- 
tances their  use  should  become  general,  but  in  order  to  accomplish 
this  it  necessarily  becomes  a  give  and  take  proposition. 

Won't  you  therefore,  when  asked  by  your  customers  to  give  accep- 
tances, kindly  give  them,  for  in  so  doing  you  will  greatly  encourage 
this  up-to-date-method  of  financing  business. 
Thanking  you  for  your  cooperation,  we  are, 

Very  respectfully, 

(Signed)     William  S.  Irish, 

Vice-President. 

Another  form  of  publicity  used  by  this  bank  follows : 

First  National  Bank 
In  Brooklyn 
Dear  Sir  : — 

There  are  many  advantages  in  the  use  of  the  trade  acceptance,  a 
specimen  of  which  is  enclosed  herewith. 

For  example,  suppose  you  are  a  wholesaler  and  in  selling  goods  to 
a  customer  on  credit,  instead  of  charging  the  purchase  against  him  on 
your  books,  it  is  agreed  between  you  that  you  draw  a  bill  on  him  for 
the  proper  amount,  payable  in  30,  60  or  90  days. 

When  "accepted"  by  the  buyer  (that  is,  when  he  signs  his  name  in 
the  blank  provided  for  it  across  the  end  of  the  draft)  the  bill  becomes 


i6o  Bank  and  Trade  Acceptances 

a  "trade  acceptance"  and  may  be  discounted  at  your  bank,  which,  if 
it  is  a  member  of  the  Federal  Reserve  System,  may  rediscount  it  with 
the  Federal  Reserve  Bank. 

Thus,  an  account  that  ordinarily  would  have  to  be  carried  on  your 
ledger  until  maturity  is  converted  into  "commercial  paper"  which,  in 
turn,  may  be  converted  into  cash. 

The  First  National  Bank  wants  to  assist  all  it  can  in  the  develop- 
ment of  the  trade  acceptance  plan  at  this  time.  We  feel  that  it  is  not 
only  a  profitable  method,  but  also  a  patriotic  service  for  every  business 
man  to  conduct  his  business  transactions  in  such  a  manner  as  will 
keep  his  resources  available  for  immediate  use,  when  our  country 
must  employ  all  possible  capital  and  credit. 

We  should  be  very  glad  to  explain  to  you  more  fully  just  how  trade 
acceptances  will  help  you,  whether  you  are  a  buyer  or  a  seller. 

Yours  truly, 
(Signed)     William  S.  Irish, 
Vice-President. 


CHAPTER  XV 

Progress  in  the  Acceptance  Method 

FOR  AND  AGAINST 

Expressions  and  Opinions 

From  the  Leading  Commercial  and  Financial  Organisations,  the  Govern- 
ment, the  Bankers  and  Specialists  on  the  Acceptance  Method 

Herewith  are  reviewed  the  opinions  and  expressions  of  some  of  the 
leading  commercial  and  financial  organizations,  the  Government,  bank- 
ers and  specialists  on  the  acceptance  method,  qualified  to  speak  upon 
the  subject. 

Also,  there  are  given  extracts  from  some  of  the  leading  articles  on 
acceptances,  as  well  as  extracts  from  the  speeches  of  the  leading  pro- 
ponents of  the  acceptance  method. 

These  may  be  taken  as  conclusive  evidence  of  the  practicability  of 
the  acceptance  from  those  who  have  studied  it  from  every  angle  and 
who  have  proved  to  themselves  that  it  is  far  better  than  any  credit 
system  that  has  ever  been  devised. 

It  has  been  estimated  by  the  leading  credit  associations  of  the 
country  that  at  the  present  time  more  than  ten  thousand  firms  and 
business  establishments  are  users  of  the  acceptance  in  one  form  or 
another. 

The  American  Acceptance  Council,  an  organization  especially  ex- 
isting for  the  furtherance  of  the  acceptance  method,  estimates  that 
there  are  more  than  that  number  of  users. 

Nationwide  investigations  conducted  in  the  interests  of  better  busi- 
ness for  the  country  show  that  in  those  cases  where  the  acceptance 
has  been  put  to  the  test,  rarely  has  it  failed  to  supply  the  desired 
results. 

Not  only  is  the  acceptance  of  benefit  to  its  present  users,  but  it 
holds  out  equal  advantages  for  the  country's  business  in  general.    True 

i6i 


i62  Bank  and  Trade  Acceptances 

it  is  that  the  acceptance  method  is  not  intended  to  eliminate  all  other 
forms  of  banking  credit,  for,  in  some  lines  of  business,  its  use  would 
be  to  confuse  existing-  methods  rather  than  to  aid  them.  The  accep- 
tance is  not  intended  as  a  substitution  for  all  prior  methods.  It  is,  on 
the  other  hand,  an  improvement  in  credit  methods. 

If  the  acceptance  could  save  for  the  merchant  but  a  small  fraction  of 
a  per  cent,  of  the  annual  turnovers  in  business,  in  costly  account  carry- 
ing, in  frozen  liquid  accounts,  tied  up  and  awaiting  settlement,  in  tied 
up  capital,  in  lost  motion,  in  extra  expense  of  conducting  business, 
in  bad  debts,  in  slow  collections  and  other  evils;  if  it  could  be  the 
means  of  an  open  discount  market  capable  of  absorbing  the  commer- 
cial paper  produced  by  the  country's  business,  thereby  creating  liquid- 
ity in  the  nation's  resources,  and  be  a  means  of  extending  financial 
equilibrium  at  all  times,  with  the  cheapening  of  money  and  its  advan- 
tages to  business, — can  we  not  say  that  the  acceptance  is  a  national 
asset — a  means  of  conserving  the  national  resources? 

Let  us  see  what  the  following  say: 

From  the  Government 

The  following  interesting  letter  was  received  from  Governor  W.  P. 
G.  Harding  of  the  Federal  Reserve  Board  by  the  American  Acceptance 
Council,  and  expresses  clearly  the  attitude  of  that  highest  of  financial 
tribunals  in  the  country  towards  the  trade  acceptance  method : 

^'To  THE  American  Acceptance  Council,  New  York: 

"The  Board  is  advised  by  letter  from  your  Executive  Secretary, 
dated  October  22nd,  that  the  American  Acceptance  Council,  organized 
to  encourage  the  use  of  bankers'  and  trade  acceptances,  is  at  this  time 
conducting  a  campaign  in  the  interests  of  trade  acceptances. 

"Your  activities  in  this  connection  are  observed  by  the  Board  with 
satisfaction.  It  is  a  matter  of  public  knowledge,  justified  by  frequent 
and  emphatic  expressions  from  the  Board,  that  the  purposes  of  the 
Federal  Reserve  Act  would  in  many  cases  be  better  served  by  the  gen- 
eral adoption  of  trade  acceptances  in  lieu  of  book  accounts  and  'one 
name'  paper.  The  acceptance  has  the  added  security  of  a  second  name, 
it  usually  evidences  upon  its  face  that  it  represents  a  commercial,  in- 
dustrial or  agricultural  transaction,  and  gives  reasonable  assurance 
that  it  will  be  liquidated  at  maturity  by  proceeds  from  the  sale  of  the 
identical  goods  involved.  For  these  reasons,  the  Board  believes  that 
this  class  of  credit  instrument  is  often  more  desirable  than  single  name 
paper  as  an  investment  for  the  funds  of  the  Federal  Reserve  banks. 


Commercial  Banking  and  Credits  163 

and  has  backed  this  belief  by  authorizing  a  preferential  rate  for  trade 
acceptances, 

"There  are,  of  course,  some  branches  and  kinds  of  business  which 
are  not  adaptable  to  the  use  of  trade  acceptances,  and  the  question  of 
such  adaptability  must  be  left  to  the  judgment  of  those  interested. 
The  Board  does  not  undertake  to  urge  the  use  of  the  trade  acceptance 
against  the  wishes  of  interested  parties,  but  merely  takes  the  view 
that  the  trade  acceptance  represents  generally  a  convenient  and  scien- 
tific kind  of  credit  instrument  and  has  no  hesitancy  in  recommending 
that  it  be  utilized  wherever  practicable. 

"Very  truly  yours, 

"(Signed)     W.  P.  G.  HARDING, 

"Governor." 

From  the  Commercial,  Financial  and  Credit  Organizations 

At  the  24th  annual  convention  of  The  National  Association  of 
Credit  Men,  held  in  Detroit,  on  June  loth  to  13th,  1919,  the  following 
resolutions  were  recommended  in  a  report  presented  by  its  Committee 
on  Banking  and  Currency : 

"Resolved,  That  the  National  Association  of  Credit  Men  hereby  re- 
affirms the  action  of  former  conventions  in  approving  the  principles 
of  the  trade  acceptances  as  a  desirable  credit  instrument  for  the  ordi- 
nary commercial  transactions  of  the  nation,  believing  that  the  trade 
acceptance  is  superior  to  the  open  book  account,  that  it  is  a  logical 
development  of  the  Federal  Reserve  Act  in  the  emphasis  and  dignity 
it  gives  to  commercial  paper  as  a  national  asset,  and  that  it  will  tend 
to  decrease  trade  abuses,  give  greater  liquidity  to  capital,  and  there- 
fore should  be  known  and  used  generally  in  mercantile  credits. 

"Resolved,  That  in  the  approval  given  by  this  convention  to  the  trade 
acceptance,  it  is  earnestly  recommended  that  in  the  literature  of  the 
National  Association  and  local  associations,  and  in  the  activities  of 
succeeding  committees,  this  be  the  attitude  taken — that  wherever  the 
trade  acceptance  is  found  adaptable  and  can  be  used  to  advantage  by 
the  credit  grantor,  he  be  encouraged  to  use  it  without  restraint  or 
criticism  ;  that  those  who  do  not  find  it  adaptable  or  of  economic  advan- 
tage at  this  time  in  their  credit  transactions  be  not  required  to  use  it; 
the  convention  believing  that  such  attitude  will  permit  the  subject  to 
receive  study  and  consideration  without  any  rancor  and  those  insinua- 
tions that  would  impeach  the  intelligence  of  one  either  favorably  or 
unfavorably  inclined  toward  the  instrument." 

From  the  American  Bankers  Committee  on  Acceptances 

The  list  of  known  users  of  the  Trade  Acceptance  has  grown  rapidly, 
having  increased  over  four  thousand  in  the  period  of  one  year.    It  in- 


1 64  Bank  and  Trade  Acceptances 

eludes  practically  every  line  of  industry  and  all  sections  of  the  United 
States.  Out  of  the  reports  received  not  one  single  valid  objection  has 
been  presented  where  proper  use  of  the  Trade  Acceptance  has  been 
undertaken.  In  every  legitimate  case  the  instrument  is  praised  most 
highly.  Experience  has  actually  demonstrated  that  the  use  of  the 
Trade  Acceptance  enables  an  equal  amount  of  capital  to  do  a  greater 
amount  of  service.  It  has  also  enabled  its  users  to  reduce  their  bills 
payable  account,  to  buy  a  greater  amount  of  Treasury  Bills  and  to 
handle  without  difficulty  the  increasing  volume  of  their  business  with 
the  attending  high  prices,  to  shorten  the  credit  period,  to  reduce  the 
number  of  claims  and  disputes,  to  afiford  a  definite  check-up  on  all 
transactions,  and  to  generally  stabilize  their  business — producing  at 
the  same  time  a  great  volume  of  liquid  paper,  eligible  for  rediscount 
at  the  Federal  Reserve  banks  and  for  service  as  the  basis  of  currency 
issue. 

The  following  paragraphs  are  taken  from  the  recommendation  of 
the  Chamber  of  Commerce  of  the  State  of  New  York,  one  of  the  old- 
est organizations  of  the  kind  in  existence  and  noted  for  the  sound  and 
conservative  quality  of  its  judgment,  on  the  Trade  Acceptance : 

"A  new  step  of  importance  to  the  development  of  the  Federal  Re- 
serve System  will  be  the  adoption  by  merchants  of  the  method  of 
settling  accounts  by  Trade  Acceptances.  Your  Committee  desires  to 
give  its  approval  to  the  principle  involved  in  this  method  of  settling 
accounts  between  sellers  and  buyers.  It  believes  that  merchants 
throughout  the  country  should  be  encouraged  in  every  way  to  study 
the  question  of  Trade  Acceptances  and  to  bring  the  matter  to  the 
attention  of  their  customers.  The  introduction  of  new  methods  of 
business  of  this  description  requires  time  and  patience,  in  order  that 
those  adopting  them  may  become  thoroughly  familiar  with  their 
methods  and  with  the  benefits  to  be  derived  therefrom." 

From  Proponents  of  the  Acceptance  Method 

Paul  M.  Warburg,  chairman  of  the  Executive  Committee  of  the 
American  Acceptance  Council,  made  the  following  statement  of  prin- 
ciples relative  to  trade  acceptances  at  the  first  meeting  of  the  Execu- 
tive Committee  of  the  Council  on  April  14th,  1919: 

"We  are  preaching  the  gospel  of  the  trade  acceptance  for  no  other 
purpose  than  that  we  believe  its  use  makes  for  sounder  business  and 
banking  conditions. 

"We  do  not  say  that  single  name  paper  is  not  good,  or  illiquid ;  but 
we  may  fairly  say  that  the  trade  acceptance  is  better  and  more  liquid. 


Commercial  Banking  and  Credits  165 

"We  do  not  say  that  the  trade  acceptance  serves  all  purposes  and 
that  all  cash  sales  and  all  cash  discounts  ought  to  be  avoided ;  but  we 
do  say  that  where  business  is  not  done  on  a  strictly  cash  basis,  the 
trade  acceptance  will  be  found  the  safer,  sounder,  and  in  the  long-  run, 
more  economical  method  than  the  open  accounts. 

"Indeed  we  believe  that  it  is  so  much  of  an  improvement  over  the 
open  account  that  in  some  cases  sellers,  at  present  sacrificing  a  very 
heavy  cash  discount  for  the  purpose  of  avoiding  the  dangers  and  incon- 
veniences of  open  accounts,  might  find  it  to  their  advantage  to  con- 
sider the  economy  involved  in  the  use  of  the  trade  acceptance  when 
dealing  with  customers  of  strong  credit. 

"We  do  not  want  to  appear  as  wishing  to  force  upon  anybody  the 
adoption  of  the  trade  acceptance,  unless  he  considers  it  as  serving  his 
better  interest.  W^e  do  wish,  however,  those  who  can  profit  from  the 
method  to  study  it  carefully  and  not  to  hesitate  to  adopt  it. 

"The  American  Acceptance  Council's  interest  in  the  matter  is  that 
whatever  makes  for  better  morals  in  business  and  for  better  credit 
and  banking  conditions  is  a  decided  benefit  to  the  United  States." 

In  the  banker  the  acceptance  should  find  an  enthusiastic  friend. 
From  purely  business  considerations  its  merit  should  appeal  to  him 
powerfully.  To  him  and  his  interests — its  general  use  would  mean 
a  better  business  tone,  higher  business  morality,  safer  business  risks, 
sounder  assets,  cleaner  commercial  paper,  greater  liquidity,  a  broader 
scope  of  usefulness,  and  the  diverting  to  the  bank  of  profitable  business 
functions  which  logically  belong  there,  but  which  at  present,  under  the 
antiquated  and  inequitable  open-book  account  method  of  treating 
credits,  are  performed  by  the  seller  of  merchandise  not  only  without 
profit,  but  to  his  distinct  disadvantage. 

The  business  man  who  now  sells  upon  open-book  account,  and  who 
suffers  from  the  injustice  which  follows  its  use  by  his  customers, 
should  hail  with  delight  the  relief  suggested  in  the  coming  of  the 
acceptance.  None  can  realize  as  he  the  awkwardness  and  even  danger 
of  trade  burdens  which  had  their  origin  in  bad  business  practice  and 
which  find  their  only  justification  in  the  sorry  fact  that  business  weakly 
allows  itself  to  tolerate  them.  Why  the  manufacturer  or  dealer  will 
allow  his  perfectly  good  capital  to  be  tied  up  in  frozen  book  accounts 
for  unreasonable  periods  of  time,  determined  by  the  whim  of  the 
buyer,  when  in  the  use  of  the  trade  acceptance  there  is  suggested  a 
means  whereby  each  transaction  virtually  will  finance  itself,  and  be 
paid  definitely  at  maturity,  is  a  thing  difficult  to  reconcile  with  the 
conceded  cleverness  of  the  American  business  man. 

It  is  difficult  to  understand,  too,  why  this  class  of  business  men 
should  tolerate  open-book  account  evils  in  the  form  of  indefiniteness, 
overdue  obligations,  bad  debt  and  interest  losses,  disturbance  of  profit 
calculations,  collection  annoyances  and  cxi)ense,  and  the  rest  of  a  long 


1 66  Bank  and  Trade  Acceptances 

list  of  undesirables — when  every  proper  protection  for  their  credit 
interests  is  provided  in  the  acceptance  method. 

The  interest  of  the  buyer  of  merchandise  in  the  acceptance,  although 
perhaps  less  clearly  apparent  than  that  of  banker  and  seller,  neverthe- 
less is  a  substantial  one,  particularly  in  view  of  the  fact  that  in  the 
series  of  commercial  processes  which  extends  from  production  to  con- 
sumption, every  buyer  but  the  last  is  a  seller,  and  every  seller  but  the 
first  a  buyer.  In  this  way  every  buyer  except  the  ultimate  consumer 
buys  that  he  may  sell,  and  hence  in  his  attitude  toward  the  acceptance 
both  points  of  view  must  be  included,  (From  an  address  by  Mr. 
Lewis  E.  Pierson,  President  of  the  Irving  National  Bank). 

D,  C.  Wills,  Chairman,  Federal  Reserve  Bank  of  Cleveland,  says : 

"Trade  acceptances  automatically  furnish  that  highest  class  of  credit 
data,  namely  accurate  information,  enabling  bankers  to  estimate  more 
intelligently  the  responsibility  of  their  borrowers.  A  high  grade  trade 
acceptance  will  find  a  wide  market. 

"Every  time  a  trade  acceptance  is  substituted  for  a  promissory  note 
based  on  the  mixed  and  undefined  credit  of  the  maker  or  for  a  book 
credit  of  still  more  ambiguous  character,  a  step  has  been  taken  toward 
the  ideal  of  sound  trade  credit." 

A  TRADE  ACCEPTANCE  REVIEW 

By  Robert  H.  Bean 

Executive  Secretary  American  Acceptance  Council 

The  elevation  of  acceptance  credits  to  a  position  second  only  to  cash 
is  an  accomplishment  of  the  first  year  of  the  new  era  in  American 
business  methods  following  the  world  war.  The  necessity  of  a  change 
from  the  time-worn  open  account  system  of  settling  for  merchandise 
purchased  on  credit  has  been  recognized  for  several  years.  A  pre- 
liminary agitation  and  discussion  to  bring  this  about  has  been  carried 
on  with  special  emphasis  during  the  past  twelve  months  by  industrial 
and  financial  organizations  throughout  the  country. 

Trade  and  bankers  acceptances  are  an  established  fact  in  the  opera- 
tion of  our  domestic  and  foreign  trade.  No  change  of  whatever  merit 
in  our  system  of  business  or  finance  has  ever  or  will  take  place  without 
opposition.  The  arguments  of  early  opponents  to  this  system,  based 
as  they  were  on  the  idea  that  the  old  methods  were  good  enough,  have 
been  long  since  met  by  sounder  logic  founded  on  the  analysis  of  mod- 
ern day  needs,  and  the  proponents  of  such  arguments  have  steadily 
decreased  in  numbers. 


Commercial  Banking  and  Credits  167 

The  custom  of  selling  merchandise  on  time  and  carrying  the  charges 
on  open  account  had  been  so  long  in  vogue  that  many  did  not  recog- 
nize the  merit  of  a  system  that  would  release  for  other  purposes  the 
more  than  four  billion  dollars  tied  up  in  frozen,  illiquid  open  account 
credits.  Far-seeing  and  open-minded  students  of  the  commercial  and 
financial  needs  of  the  new  America,  however,  recognized  at  a  date 
closely  following  the  action  of  the  Federal  Reserve  Board  that  in  the 
fullest  development  ofthis  economically  sound  system  of  finance  lay 
tremendous  possibilities.  The  very  small  number  of  users  of  accep- 
tances from  1915  to  1917  has  increased  to  many  thousands,  made  up  of 
merchandising  concerns  in  all  parts  of  the  country. 

The  basic  principle  underlying  the  use  of  the  acceptance  method  of 
settling  accounts  is  that  it  will  bring  about  the  improvement  of  the 
credit  position  of  the  individual,  corporation,  community  and  nation. 
That  such  a  condition  is  the  goal  of  business  men  and  bankers  through- 
out the  world  should  be  acknowledged  without  question.  Next  to  the 
cash  discount  system  it  commands  the  highest  regard,  and,  contrary 
to  the  impression  of  some,  the  trade  acceptance  method  need  not  in- 
terfere in  the  slightest  with  the  system  of  paying  cash  within  a  stated 
period  and  taking  a  discount  for  it. 

It  is  not  claimed  by  the  proponents  of  the  acceptance  method  that 
acceptances  can  be  used  with  equal  facility  in  every  kind  of  business. 
In  fact,  it  is  admitted  that  it  may  not  be  to  advantage  of  some  kinds  of 
business  to  use  this  system,  but  it  is  claimed  that  for  a  very  large  part 
of  the  commercial  interests  of  this  country  the  acceptance  system  can 
be  used  with  remarkable  success.  It  is  not  a  cure-all  for  every  defect 
in  the  nation's  credit  machinery.  There  is  no  mystery  about  a  trade 
acceptance,  neither  is  there  any  magic  by  which  a  bad  account  will  be 
made  good  or  relieve  the  necessity  for  continued  careful  scrutiny  of 
credits  by  the  credit  departments  of  business  houses  and  banks.  It 
is  simply  an  acknowledgment  of  a  debt  and  its  execution  reflects 
credit  upon  the  buyer  as  well  as  the  seller  and  is  the  evidence  of  a 
well-organized,  carefully  managed  business. 

The  American  Acceptance  Council  has  found  that  the  acceptance 
method  of  financing  is  now  used  to  some  extent  in  practically  every 
kind  of  business  where  goods  are  sold  outright  and  where  sales  terms 
are  other  than  cash.  Many  national  associations  of  wholesalers  and 
retailers  have  endorsed  the  system  and  have  recommended  its  use  by 
members.  The  American  Bankers  Association  at  its  last  convention 
reaffirmed  its  stand  on  acceptances  and  provided  for  the  appointment 
of  committees  composed  of  business  men  and  bankers  who  are  to 
make  a  study  of  the  entire  question,  work  out  a  system  of  handling 
acceptances  in  banks  and  business  houses,  and  to  determine  upon  a 
reasonable  charge  for  collection,  exchange  and  service  by  banks  to 
which  these  items  pass  for  payment. 

The  volume  of  bankers  acceptances  has  increased  with  each  suc- 
ceeding month,  and  remarkable  headway  has  been  made  in  the  estab- 


i68  Bank  and  Trade  Acceptances 

lishment  of  an  open  discount  market  in  this  country  similar  to  that 
which  has  been  in  existence  in  England  and  the  continent  for  genera- 
tions. 

As  the  bankers  in  smaller  cities  realize  the  investment  possibilities 
of  this  class  of  paper,  there  will  be  a  greater  desire  on  their  part  to 
familiarize  themselves  not  only  with  the  bills  offered  for  purchase  but 
the  circumstances  surrounding  their  creation  and  the  rates  which  they 
demand. 

There  is  nothing  temporarily  or  transitory  about  the  acceptance 
system.  It  has  been  carefully  studied  by  our  financiers  for  several 
years,  and  that  it  fits  in  with  our  plan  of  readjustment  after  the  extra- 
ordinary conditions  through  which  we  have  passed  is  the  combined 
thought  of  the  ablest  minds  in  our  financial  and  industrial  affairs. 

The  remarkable  success  in  developing  trade  and  industry  in  Eng- 
land and  other  European  countries  may  be  laid  to  the  policy  followed 
by  bankers  and  business  men  in  those  countries  to  seek  out  and  apply 
those  principles  which  work  for  the  greatest  benefit  to  the  commerce 
of  the  country  rather  than  to  that  plan  which  will  yield  in  dollars  the 
greatest  immediate  return. 

The  demand  which  we  face  at  this  time  is  for  the  fullest  use  of  our 
resources,  and  this  can  best  be  done  by  releasing  a  greater  amount,  if 
possible,  of  illiquid  and  tied  up  credits. 

From  reports  gathered  throughout  this  past  year  by  the  American 
Acceptance  Council,  it  is  safe  to  say  that  the  progress  thus  far  made, 
and  the  promise  of  still  greater  development  in  the  use  and  operation 
of  trade  and  bankers  acceptances,  augur  well  for  the  future  prosperity 
of  the  commerce  of  this  country. 

THE  OTHER  SIDE  OF  THE  QUESTION 

In  order  to  present  both  sides  of  the  question  on  the  use  of  trade 
acceptances,  the  following  letter  written  by  the  assistant  treasurer  of 
a  large  manufacturing  company  in  the  United  States  is  given.  It 
should  not  be  construed  that  the  acceptance  method  is  impracticable 
for  similar  lines  of  business,  as  the  letter  merely  expresses  a  view- 
point as  to  its  limitations.  The  last  paragraph  contained  in  this  letter 
tells  the  story.  However,  it  has  been  found  in  the  past,  and  bankers 
and  large  business  houses  have  testified  to  the  fact,  that  it  is  the  larger 
corporations,  the  resources  of  which  are  tremendous  and  which  do 
not  require  borrowing,  doing  business  on  practically  a  cash  basis,  that 
find  very  little  use  for  the  trade  acceptance.  These  large  corporations 
do  not  care  to  give  any  trade  acceptances  for  they  virtually  control 
the  situation.    In  a  letter  received  by  the  Institute,  another  manufac- 


CoMMERaAL  Banking  and  Credits  169' 

turing  firm  states  that  it  is  due  to  these  larger  corporations  that  the 
acceptance  method,  which  is  conceded  by  the  highest  commercial  and 
financial  interests  of  the  country  to  be  of  most  good,  is  retarded  in  its 
development.  This  firm  states  that  activities  directed  to  the  develop- 
ment of  the  acceptance  method  should  start  with  these  firms  first. 

As  you  know,  we  are  definitely  committed  to  the  granting  of  an 
unusually  large  cash  discount.  Our  5  per  cent,  cash  discount,  which 
is  a  part  of  our  terms  for  all  branches  of  our  line,  is  equalled  only  by 
the  cash  discount  granted  on  a  few  special  lines  in  the  garment  field. 
You  are  familiar  with  the  reasons  for  the  granting  of  this  unusually 
large  cash  discount.  Since  we  are  dealing  largely  with  merchants  of 
limited  capital,  we  do  everything  that  we  can  to  make  a  man  turn  his 
capital  often. 

The  primary  purpose  of  the  trade  acceptance  movement  is  to  expand 
the  credit  structure  of  the  nation.  Of  course  this  expansion  does  not 
in  any  way  increase  the  actual  amount  of  wealth.  What  we  strive 
to  do  with  our  long  cash  discount  is  to  make  a  man  turn  his  capital 
frequently  and  it  follows  that  every  time  that  he  turns  his  capital  and 
makes  a  profit  it  is  producing  wealth. 

From  the  standpoint  of  the  national  interest  in  the  present  emer- 
gency, it  has  been  held  by  a  dozen  or  more  of  the  country's  largest 
bankers,  to  whom  our  particular  problem  has  been  submitted  in  detail, 
that  we  serve  the  country  better  by  making  our  customers'  dollars 
work  overtime  than  we  would  by  deferring  payments  and  lengthening 
terms,  in  accordance  with  the  trade  acceptance  plan. 

Looking  at  this  question  from  a  standpoint  solely  of  the  interests  of 

the Company,  there  are  several  things  to  be  considered :   First 

of  all,  the  acceptance  plan  has  been  devised  to  assist  the  man  whose 
results  in  handling  open  accounts  have  been  just  average,  or  less  than 
average.  It  so  happens  that  our  results,  over  a  period  of  years,  have 
been  very  much  better  than  the  average.  Our  accounts  receivable  are 
not  uncertain ;  our  losses  are  negligible ;  our  cash  discount  terms  are 
enforced  in  all  of  our  dealings  with  all  of  our  customers.  If  we  are  to 
put  into  operation  a  system,  which  is  planned  to  bring  up  the  man  who 
has  been  getting  poor  results  to  a  level  where  he  can  expect  average 
returns,  we  actually  will  have  to  bring  ourselves  down  to  a  lower 
level  than  that  upon  which  we  have  been  doing  business.  This  is  just 
a  matter  of  mathematics.  We  are  not  taking  credit  to  ourselves,  be- 
cause our  collection  results  have  been  exceptionally  good  (we  know 
that  they  can  be  better),  but  we  do  not  care  to  lose  any  of  our  "punch" 
merely  because  a  lot  of  other  fellows  have  slow  accounts  and  cannot 
enforce  cash  discount  terms. 

If  we  were  to  make  a  general  use  of  trade  acceptances,  we  probably 
could  discount  those  acceptances  and  in  this  way  borrow  money  at  a 
figure  slightly  under  the  current  market  rate  for  single  name  paper. 


170  Bank  and  Trade  Acceptances 

At  the  same  time,  if  we  did  this  we  would  be  merely  borrowing  money 

on  the  name  of Company,  so  far  as  most  of  the  acceptances 

might  be  concerned,  because  we  have  very  few  customers  whose  names 
on  the  pieces  of  commercial  paper  would  mean  anything  as  a  basis  for 
borrowing  from  our  banks  in  New  York,  Philadelphia,  Boston,  or 
Chicago. 

Furthermore,  it  would  be  necessary  to  create  a  special  department  to 
handle  these  acceptances.  The  maintenance  of  such  a  department 
would  represent  a  considerable  item  of  expense.  It  would  also  be 
necessary  to  set  up  and  to  keep  up  a  reserve  to  pay  discounted  accep- 
tances which  our  customers  did  not  meet  when  they  came  due.  The 
interest  on  this  reserve  alone  would  more  than  eat  up  the  slight  saving 
in  the  cost  of  borrowed  money  secured  on  acceptances. 

It  must  be  borne  in  mind  also,  that  if  we  were  to  use  acceptances 
regularly  throughout  the  year,  we  would  face  a  necessary  lengthening 
of  our  terms.  We  could  not  profitably  arrange  to  discount  and  redis- 
count customers'  paper  which  would  run  for  less  than  60  days.  This 
would  react  directly  upon  the  Credit  Department,  because,  instead  of 
being  in  a  position  to  shut  off  upon  a  man  when  he  did  not  take  advan- 
tage of  his  cash  discount  for  a  single  month's  purchases,  our  cash  dis- 
count would  be  eliminated  and  we  would  have  no  excuse  for  shutting 
off  deliveries  until  a  man  failed  to  meet  his  first  acceptance  at  the  end 
of  60,  or  possibly  even  90  days. 

The  credit  men  also  would  face  the  problem  of  handling  customers 
who  would  give  acceptances,  sincerely  believing  that  these  accep- 
tances represented  cash  and  actually  paid  their  accounts.  For  ex- 
ample, a  dealer,  with  a  credit  limit  of  $5,000  would  order  $5,000  worth 
of  goods  from  us,  under  the  dating  proposition,  in  January  and  would 
give  us  an  acceptance  for  $5,000  when  the  goods  were  delivered.  It 
would  be  a  very  difficult  thing  for  us  to  convince  that  dealer  that  by 
giving  us  his  name  on  a  piece  of  paper  he  had  not  actually  paid  his  bill. 
If  he  were  to  give  us  an  acceptance,  it  would  be  nothing  more  than 
natural  for  him  to  expect  to  come  right  in  to  order  and  receive  another 
$5,000  worth  of  goods  on  open  account.  Of  course  the  acceptance 
would  merely  serve  as  a  basis  for  borrowing  and  the  transaction  would 

produce  no  money  except  such  money  as  the Company  would 

borrow  and  pay  for.  The  customer's  account  would  not  be  settled 
until  the  acceptance  cleared  at  his  bank  on  the  due  date.  If,  after 
taking  his  $5,000  acceptance  we  were  to  give  him  another  $5,000  worth 
of  goods  on  open  account,  we  merely  would  be  doubling  his  limit  with- 
out any  sort  of  security. 

From  the  standpoint  of  the Company  alone,  therefore,  the  use 

of  the  trade  acceptance  would  involve  additional  operating  detail  and 
additional  expense,  with  an  actual  slowing  up  of  our  collection  meth- 
ods and  an  increase  in  risks. 

From  the  standpoint  of  the  salesmen  in  the  field,  the  trade  accep- 
tance is  a  mean  thing  to  handle,  because  at  the  time  he  takes  the 


Commercial  Banking  and  Credits  171 

order  the  salesman  is  compelling  the  buyer  to  think  definitely  and 
specifically  about  paying  the  bill.  The  chances  are  if  an  order  is  taken 
for  a  thousand  dollars  and  then  the  salesman  asks  the  customer  to  sign 
an  acceptance  for  a  thousand  dollars,  that  in  many  cases  the  customer 
will  wish  to  be  on  the  safe  side  of  things  and  will  actually  cut  down 
the  amount  of  the  order  placed  with  us.  Further,  if  we  are  to  place 
upon  the  salesman  in  the  field  the  burden  of  explaining  a  trade  accep- 
tance plan  to  customers,  we  are  going  to  make  it  necessary  for  him  to 
spend  a  good  part  of  his  time  selling  this  part  of  the  program  to  cus- 
tomers— the  time  which  might  otherwise  be  devoted  directly  to  pro- 
ducing orders. 

When  the  proposition  is  viewed  from  the  standpoint  of  the  customer, 
there  is  just  one  question  to  be  asked  and  answered.    Why  should  any 

customer  who  has  regularly  discounted  his  bills,  give  to  the  

Company  a  trade  acceptance,  unless  conditions  have  so  changed  that 
we  actually  need  that  customer's  assistance  in  financing  his  purchases 
through  a  dating  period?  When  we  ask  the  customer  for  an  accep- 
tance, we  give  him  nothing  in  return  for  it — it  is  just  an  additional 
consideration  that  he  is  showing  us.  If  we  are  dealing  with  customers 
who  live  up  to  the  contracts  that  they  make  and  if  we  see  to  it  that 
they  do  live  up  to  these  contracts,  the  acceptance  would  give  to  the 
customer  nothing  that  he  does  not  already  have,  and,  as  many  cus- 
tomers will  persist  in  viewing  it,  would  be  merely  requiring  the  cus- 
tomer to  give  some  form  of  "security"  as  a  guarantee  that  he  will  pay 
his  bills  when  he  says  he  will.  If  a  customer  always  has  maintained 
a  clean  discount  record  with  us  it  would  be  a  little  bit  hard  for  him  to 
figure  out  why  we  should  require,  at  the  present  tinte  from  him,  more 
than  we  have  in  the  past. 

We  believe  that  the  trade  acceptance  is  an  excellent  thing  for  the 
concern  of  limited  capital  doing  business  with  established  corpora- 
tions, whose  names  on  acceptances  will  be  a  direct  addition  to  the 
borrowing  power  of  the  people  to  whom  the  acceptances  are  given. 
We  believe  in  acceptances  for  houses  selling  goods  on  very  long  terms 
to  customers  who  are  not  in  the  habit  of  paying  promptly,  also  for 
houses  that  have  found  open  accounts  to  be  "a  very  uncertain  thing^' 
and  for  those  houses  who  experience  great  difficulty  in  enforcing  cash 
discount  terms. 


CHAPTER  XVI 

IMPORTANCE  OF  THE  ACCEPTANCE  TO  THE   NATIONAL 

INTEREST 

Modernization  of  the  Credit  Structure 

The  high  quality  of  the  bank  and  trade  acceptance  as  commercial  paper 
lias  induced  the  Federal  Reserve  Board  to  adopt  and  use  it  as  a  sort 
of  special  currency.  The  extension  of  government  credit  is  effected  on 
the  basis  of  gold  and  the  highest  class  commercial  paper  denominated  as 
bank  and  trade  acceptances.  As  gold  is  not  present  in  sufficient  quantity 
— dollar  for  dollar — to  meet  the  tremendous  sums  of  money  required  for 
the  conduct  of  the  nation's  business,  it  becomes  necessary,  in  order  that  the 
currency  and  credit  of  the  country  may  be  kept  in  a  most  liquid  state,  that 
some  substitute  measuring  up  to  the  qualities  of  gold  itself,  be  used. 
The  acceptance,  as  high  class  commercial  paper  possessing  the  qualities 
required  by  the  Board,  is,  therefore,  of  great  importance  to  the  main- 
tenance of  an  ideal  credit  system.  The  acceptance  modernizes  the  coun- 
try's credit  structure,  and  it  is  for  this  purpose  that  bankers  and  business 
men  should  encourage  their  use  in  every  way. 

LIQUIDITY  OF  THE  NATION'S  RESOURES  MADE  POSSIBLE 
BY  THE  EXTENSION  OF  THE  ACCEPTANCE  METHOD 

The  desire  on  the  part  of  commercial  and  financial  interests  of  the 
country,  as  well  as  the  government  itself,  is  towards  maintaining  the 
resources  of  the  nation  in  a  most  liquid  state.  The  present  system  of  open 
book  accounts,  in  this  respect,  is  unwise,  since  it  ties  up  tremendous 
amounts  of  capital  and  renders  it  unproductive  of  wealth. 

Today,  in  the  country's  credit  situation,  there  is  a  vast  army  of  credit 
awaiting  to  be  mobilized  for  the  purpose  of  upbuilding  our  resources,  but 
so  long  as  we  keep  it  in  the  form  of  book  accounts,  it  is  being  unnecessarily 
chained,  fettered  and  useless,  from  being  utilized  to  the  greatest  extent. 
The  releasing  of  the  tremendous  sums  of  money  which  otherwise  lie 
dormant  and  unproductive  would  do  more  towards  mobilizing  the  national 

172 


Commercial  Banking  and  Credits  173 

resources  than  any  other  means  of  credit  extension.  In  other  words,  the 
general  adoption  of  the  acceptance  and  its  appHcation  to  the  credit  system 
of  the  country  would  increase  the  business  capital  of  the  nation. 

ADVANTAGES  TO  THE  BUYER,  SELLER  AND  BANKER, 
EQUALLY  ADVANTAGEOUS  TO  THE  NATIONAL 

INTEREST 

It  is  equally  true  that  the  advantages  which  flow  from  the  wider  use  of 
the  acceptance  in  this  country,  benefiting  alike  the  buyer,  the  seller,  the 
banker  and  the  consumer,  are  equally  advantageous  to  the  nation's  welfare. 

THE  ACCEPTANCE  AS  A  FACTOR  IN  NATIONAL 

PREPAREDNESS 

At  the  present  time,  with  the  continuous  call  for  efficiency  methods, 
and  the  general  adoption  of  those  plans  through  which  the  aims  of  the 
government  for  utilizing  the  entire  national  resources  to  the  fullest  extent 
may  be  made  possible,  the  more  systematic  operation  of  credit  and  its 
extension  should  be  equally  the  aim  of  the  entire  business  world.  The 
national  interest  demands  that  the  maximum  of  efficiency  be  introduced. 
Public  interest  is  best  subserved  by  better  and  more  conservative  business 
methods,  by  the  elimination  of  wasteful  methods  of  conducting  business, 
and  by  improved  trade  relations  and  harmony  among  the  commercial  and 
financial  world. 

WELFARE  OF  NATION  LINKED  WITH  ITS  CREDIT  SYSTEM 

Credit  is  the  life  blood  of  business.  The  welfare  of  the  nation  demands 
that  the  credit  system  should  at  all  times  be  at  the  height  of  efficiency. 
The  development  of  sounder  credit  methods  is  not  only  important  and 
urgent,  but  indispensable.  Therefore,  any  methods  having  as  their  goal 
the  bettering  of  business  methods  should  receive  the  whole-hearted  co- 
operation of  the  banker,  the  business  man  and  the  nation. 

THE  ACCEPTANCE  IN  THE  FIELD  OF  COMMERCIAL  CREDIT 

The  acceptance  method  is  of  great  importance  to  the  national  interest. 
To  the  soundness  of  the  nation's  financial  system,  it  is  necessary  that  com- 
mercial credit  be  kept  in  such  a  condition  of  fluidity  and  usability  that 
to  the  fullest  possible  extent  it  will  serve  as  an  unshakeable  foundation 
for  all  times. 


BANK 

ACCEPTANCES 

Their  History,  Practical  Uses,  Operation  under  the  Federal  Reserve 
Act,  Advantages,  Eligibility,  Discounts,  Markets,  Discount 
Corporations,  Dollar  Credits,  Investments,  etc.,  etc. 


CHAPTER  XVII 

Bank  Acceptances 

There  has  previously  been  discussed  the  nature  and  functions  of 
credit,  particularly  as  they  relate  to  commercial  credit  and  its  instru- 
ments. There  have  also  been  considered  the  various  classes  of  credit 
such  as  are  availed  of  by  individuals,  firms,  business  enterprises,  and 
Governments.  However,  by  the  banks  there  is  created  what  is  known 
as  banking  credit,  which  arises  in  a  way  similar  to  that  of  commercial 
credit. 

BANKING  CREDIT 

Banking  credit  is  the  power  of  a  bank  to  secure  advances  of  funds 
in  exchange  for  its  promises  to  pay.  In  this  respect,  it  is  related  very 
closely  to  commercial  credit,  the  only  difference  being  that  in  the 
former  case,  the  bank  is  the  source  of  credit  instead  of  a  business 
establishment.    Banks  in  this  respect  are  manufactories  of  credit. 

The  credit  of  a  bank  is  extended  by  means  of  the  bank  check,  the 
bank  note,  the  bank  draft,  and  the  newer  means, — the  bank  acceptance. 

THE  BANK  CHECK 

A  check  is  a  written  order  on  a  bank  to  pay  a  stipulated  sum  of 
money,  and  is  drawn  by  one  who  has  a  deposit  there.  It  is  usually 
made  payable  to  the  order  of  a  particular  party  and  must  be  indorsed 
by  that  party  before  it  can  be  negotiated  further  or  cashed.  A  bearer 
check  is  payable  to  anyone  who  holds  it.  Legally,  the  check  is  an 
implied  promise  on  the  part  of  the  drawer  that  there  are  sufficient 
funds  in  the  bank  to  meet  it. 

The  operation  of  bank  checks  is  so  common  that  no  explanation 
need  be  given.  They  are  of  great  utility  in  modern  commerce,  inas- 
much as  they  effect  settlements  between  distant  points  and  eliminate 
the  inconvenience  attendant  upon  the  handling  of  actual  money  in  the 
form  of  bank  notes  and  specie. 

177 


178  Bank  and  Trade  Acceptances 

THE  BANK  NOTE 

A  second  way  in  which  a  bank  extends  its  credit  is  by  the  issuance 
of  bank  notes.  Though  under  the  Federal  Reserve  System,  banks 
are  discouraged  to  issue  their  own  notes  to  circulate  at  par,  this  func- 
tion has  not,  however,  been  withdrawn  entirely,  but  has  been  transfer- 
red from  the  banks  that  previously  issued  them  into  the  privileges 
exercised  by  the  Federal  Reserve  Banks,  which  today  do  most  of  the 
bank  note  issuing.  The  bank,  may  however,  upon  the  discount  of 
proper  security  with  the  Federal  Reserve  Bank,  receive  the  proceed  in 
Federal  Reserve  notes. 

THE  BANK  DRAFT 

The  bank  draft  is  another  form  by  means  of  which  bank  credit  is 
extended.  It  is  an  order  by  one  bank  on  another  bank,  the  same  as  a 
bank  check  is  an  order  by  a  commercial  firm  on  a  bank.  Practically 
all  banks  keep  funds  on  deposit  with  banks  in  other  cities,  especially 
in  the  large  financial  centers,  in  order  that  they  might  be  able  to  meet 
the  demands  of  their  customers  for  a  form  of  payment  which  will  be 
accepted  without  question.  Banks  draw  against  these  accounts  by 
selling  their  drafts  to  their  customers,  charging  as  a  consideration  for 
the  service  a  small  sum  in  the  form  of  "exchange."  Bank  drafts  pass 
as  practically  cash  everywhere  in  the  country,  and  are  an  important 
means  by  which  settlements  are  effected  by  commercial  as  well  as 
financial  concerns.  Drafts  on  New  York  are  denominated  "New 
York  exchange"  and  are  accepted  all  over  the  country  at  par,  owing 
to  the  fact  that  New  York  is  the  commercial  and  financial  center  of  the 
country  and  that  businessmen  everywhere  have  dealings  with  New 
York. 

THE  BANK  ACCEPTANCE 

Among  the  many  radical  changes  in  the  mechanism  of  national  and 
international  finance  which  the  war  has  brought  about,  few",  if  any, 
have  been  as  important  as  the  creation  of  the  American  bank  ac- 
ceptance, the  recognition  of  the  trade  acceptance,  and  the  establish- 
ment of  the  American  discount  market. 

In  this  connection,  before  taking  up  the  treatise  on  bank  acceptances, 
their  uses  and  advantages,  it  might  be  of  interest  to  briefly  review 
the  historical  aspect  of  this  new  form  of  credit  and  to  learn  the  ex- 


Commercial  Banking  and  Credits  179 

periences  gained  by  other  nations  while  the  use  of  the  acceptance  was 
in  the  process  of  evolution  in  this  country. 

HISTORICAL  ASPECT  OF  THE  BANK  ACCEPTANCE 

The  acceptance  may  be  said  to  be  the  simple  and  logical  product  of 
generations  of  trade  and  banking  experience.  The  greatest  advance 
in  the  acceptance  method  has  been  made  by  the  leading  European 
countries,  which  long  ago  proved  to  themselves  that  the  acceptance  is 
capable  of  meeting  all  the  requirements  of  commerce  and  trade.  Along 
these  lines,  therefore,  have  the  systems  of  banking  in  Europe  been 
worked  out.  The  acceptance  established  a  system  under  which  com- 
mercial credit  assumed  a  position  of  pre-eminence  as  a  controlling  at- 
traction for  liquid  capital, — a  position  in  the  money  market  to  which 
that  form  of  credit  was  rightly  entitled. 

ENGLAND   THE   FIRST   COUNTRY  TO   DEVELOP   SOUND 

BANKING  SYSTEM 

To  England,  however,  must  fall  the  honor  of  being  the  first  to 
realize  the  great  advantages  in  the  employment  of  the  acceptance  as 
the  basis  of  its  credit  system,  since  they  were  the  peoples  to  lend  their 
credit  to  others  through  the  medium  of  this  form  of  paper.  As  a  re- 
sult, that  country  today  foreshadows  all  the  others  in  having  developed 
a  sound  financial  system  on  the  basis  of  a  sound  credit  system. 

THE  LONDON  MERCHANT  BANKERS 

The  merchant  bankers  of  London  were  originally  import  merchants 
of  exceptionally  high  standing,  who  paid  for  their  imports  by  "ac- 
cepting" long  time  drafts  drawn  upon  themselves  by  shippers  in 
foreign  countries.  After  these  drafts  had  been  accepted  by  them, 
they  were  discounted  with  Deposit  Banks  or  Private  Bankers  at  rates 
which  had  a  distinct  relation  to  the  standing  of  the  acceptors.  In  this 
way,  the  acceptance  was  created. 

Merchants  of  a  moderate  standing  then  endeavored  to  follow  the 
procedure  of  the  larger  houses  but  were  unsuccessful  in  the  early 
stages,  which  made  the  financing  of  their  importations  a  hardship. 
They  either  could  not  borrow  against  their  own  acceptances  at  all, 
or,  if  they  could,  the  rates  charged  for  interest  and  commission  to 


i8o  Bank  and  Trade  Acceptances 

insure  the  risk  were  so  high  that  the  final  cost  of  the  imported  wares 
left  too  small  a  profit  to  compensate  them  for  their  labor. 

These  merchants  discovered  that  by  borrowing  the  signature  of  one 
of  the  leading  merchants,  they  could  finance  their  imports  more  ad- 
vantageously. They  found  that  in  this  manner  they  could  acquire 
advantages  far  more  valuable  to  them  than  the  small  commission  paid 
for  the  service  rendered  by  such  leading  merchants.  At  the  same 
time,  the  leading  merchants  realized  the  opportunities  for  profit  to 
themselves  in  lending  their  signature  by  way  of  accepting  drafts  for 
other  merchants.  This  encouraged  them  to  continue  the  process  on  a 
larger  scale.  On  account  of  the  knowledge  which  they  were  able  to 
acquire,  by  reason  of  their  extended  facilities  and  experience,  on  con- 
ditions of  trade,  as  well  as  their  knowledge  of  various  kinds  of  mer- 
chandise which  were  to  be  imported  and  which  were  pledged  as  se- 
curity, of  values,  seasonal  demands  and  markets,  the  leading  mer- 
chants were  indeed  qualified  to  grant  such  credits,  that  is,  to  lend  their 
signatures  for  a  consideration. 

ACCEPTANCE  BUSINESS  FIRMLY  ESTABLISHED 

In  the  course  of  time  these  merchants  turned  more  and  more  to  the 
business  of  lending  their  credit  in  the  form  of  acceptances,  not  only 
at  home,  but  to  foreign  merchants,  banks  and  corporations.  In  connec- 
tion with  this  work  and  on  account  of  their  intimate  knowledge  of 
certain  overseas  countries,  they  became  pioneers  in  extending  loans 
abroad,  and  thus  exerted  a  vast  influence  on  the  extension  of  English 
foreign  trade. 

FRANCE  AND  GERMANY 

Turning  now  to  the  economic  history  of  France  and  Germany,  these 
two  countries  were  likewise  developing  credit  systems  of  their  own. 
The  foreign  trade  of  both  France  and  Germany  increased  step  by  step, 
and  the  ever  increasing  demand  for  acceptance  credits,  whereby  to 
finance  overseas  trade,  called  for  the  development  of  the  same  facilities 
extended  by  the  English  merchant  bankers  for  the  benefit  of  English 
trade  and  commerce. 

FIRST  EFFORTS  TO  ESTABLISH  ACCEPTANCE  BUSINESS 

UNSUCCESSFUL 

Both  France  and  Germany  had  at  that  time,  in  the  economic  his- 
tories, been  patrons  of  the  banking  system  of  England.    However,  the 


Commercial  Banking  and  Credits  i8i 

time  had  come  when  an  effort  had  to  be  made  by  both  to  break  away 
from  London  and  establish  their  own  acceptance  market  for  the  crea- 
tion and  absorption  of  credit  paper. 

But  their  efforts  in  the  first  instance  were  far  from  successful,  and 
the  franc  and  mark  were  found  to  be  poor  competitors  alongside  of  the 
English  pound  sterling.  The  reason  for  this  was  due  to  the  fact  that 
London  was  the  only  free  gold  market  in  the  world,  and  it  was  a  well 
known  fact  and  a  practice  in  national  and  international  commerce, 
that  a  bill  on  London  meant  gold  and  nothing  but  gold,  if  demanded. 
Another  reason  was  the  superiority  of  the  London  discount  market, 
which,  guided  by  a  far  sighted  discount  policy  on  the  part  of  the  Bank 
of  England,  was  always  able  and  willing  to  absorb  any  bills  offered  in 
the  market. 

Of  great  importance  to  the  further  development  of  the  English 
system  of  discount  and  rediscount,  was  the  final  recognition  of  this 
undeniable  preference  of  the  pound  sterling,  as  a  result  of  which  a 
number  of  the  most  powerful  continental  banks  established  branches  in 
London,  bringing  along  with  them  large  sums  of  money  and  additional 
facilities  for  the  granting  of  sterling  acceptance  credits,  particularly, 
of  course,  for  the  benefit  of  the  customers  of  their  home  country. 

THE    BANK    ACCEPTANCE    TODAY    IS    USED    IN    MOST 
IMPORTANT  COUNTRIES  OF  EUROPE 

From  the  early  periods  of  the  development  of  English  banking 
until  the  present  day,  a  review  of  the  system  of  credit  in  England 
shows  remarkable  growth.  There,  a  broad  discount  market  capable 
of  absorbing  all  the  commercial  paper  produced  by  the  nation's  busi- 
ness is  at  all  times  in  existence. 

The  countries  of  France  and  Germany  were  able,  in  time,  to  es- 
tablish the  franc  and  the  mark  in  the  international  commerce  carried 
on  by  the  merchants  of  their  respective  countries,  and,  while  their 
development  has  not  yet  reached  the  importance  of  the  pound  sterling 
nor  has  their  acceptance  business  reached  that  of  England  in  volume, 
still,  the  benefits  from  the  introduction  and  development  of  a  system 
of  discounts  in  the  respective  countries,  have  brought  home  to  their 
merchants  a  decided  advantage  in  the  conduct  of  their  trade. 

Some  of  the  factors  that  have  been  found  particularly  effective  in 
establishing  acceptance  markets  in  foreign  countries  have  been  large 
exports,  with  which  to  offset  imports;  direct  steamship  connection 


i82  Bank  and  Trade  Acceptances 

with  all  important  overseas  ports ;  the  establishment  of  a  charter  mar- 
ket; the  upbuilding  of  insurance  companies  to  underwrite  marine  and 
other  risks ;  extension  of  loans  to  foreign  governments,  thus  encourag- 
ing and  creating  valuable  trade  relations ;  extended  and  direct  means  of 
communication  with  foreign  governments ;  and  lastly,  the  strengthen- 
ing of  the  financial  structure  at  home  and  the  establishment  of  a  stable 
and  elastic  discount  market. 

THE  BANK  ACCEPTANCE  IN  AMERICA 

In  the  same  manner  in  which  both  France  and  Germany  patronized 
the  acceptance  facilities  of  England,  so,  under  similar  circumstances, 
until  the  establishment  of  the  Federal  Reserve  System  in  1914,  was 
America  one  of  Europe's  best  customers  in  the  use  of  its  acceptance 
facilities.  The  common  practice  of  financing  American  foreign  trade 
was  upon  the  basis  of  the  pound  sterling,  and  later,  occasionally 
through  Paris  and  Berlin.  The  annual  tribute  paid  to  Europe  for 
this  service  was  not  only  an  unnecessary  burden,  but  also  reflected 
upon  the  dignity  of  a  nation  of  the  political  and  economic  importance 
of  the  United  States  of  America. 

CREATION  OF  BANK  ACCEPTANCES  MADE  POSSIBLE  BY 
ADOPTION  OF  FEDERAL  RESERVE  SYSTEM 

In  short,  the  introduction  of  the  Federal  Reserve  Act  finally  gave  to 
national  banks  the  power  to  "accept."  The  development  of  the  ac- 
ceptance in  the  United  States  was  further  made  possible  by  the  fact 
that  the  war  had  seriously  affected  the  ability  of  foreign  institutions  to 
continue  their  acceptance  business  along  normal  lines,  America,  as  a 
result  of  the  great  war  had  become  the  world's  workshop,  and  its 
export  trade  increased  to  unparalleled  figures.  Aside  from  its  trade 
with  Europe,  new  markets  were  developed  throughout  the  world, 
calling  for  greater  banking  facilities. 

BEGINNINGS  OF  THE  AMERICAN  BANK  ACCEPTANCE 

During  the  first  year  of  the  war,  certain  such  drafts  as  were  drawn 
upon  American  banks  in  dollars,  when  offered  in  the  foreign  markets, 
were  looked  upon  by  the  foreign  bankers  with  doubtful  eyes  and  were 
not  so  favorably  accepted  from  the  start  as  were  acceptances  drawn  in 
pounds  sterling. 


Commercial  Banking  and  Credits  183 

Slowly  but  surely,  the  banks  and  bankers  all  over  the  world  began 
to  realize  that  America  had  set  its  new  financial  machinery  in  motion; 
that  a  discount  market  was  rapidly  being  established,  and  that  bank 
bills  drawn  on  New  York  could  readily  be  discounted  and  at  advan- 
tageous rates.  As  a  consequence,  foreign  bankers  began  to  quote 
closer  rates  for  such  bills,  especially  since,  simultaneously  with  these 
offerings  of  American  bank  acceptances,  a  strong  demand  for  remit- 
tances on  New  York  and  other  American  centers  sprang  up. 

Previous  to  the  introduction  of  the  bank  acceptance  in  the  United 
States,  the  usual  custom  employed  by  merchants  in  this  country  to 
finance  their  overseas  trade  was  by  the  drawing  of  bills  on  London, 
Paris  or  Berlin  for  the  purpose  of  effecting  a  settlement  of  their  debts, 
leaving  the  risk  of  exchange  to  themselves.  The  amount  paid  by 
American  business  establishments  to  foreign  banks  and  bankers  alone 
mounted  into  the  millions  of  dollars.  With  the  new  conditions  that 
arose,  due  to  the  circumstances  resulting  from  the  war,  the  acceptance 
came  into  use  and  was  shown  great  favoritism  by  the  leading  banks 
and  bankers  of  the  country.  Foreign  countries  also  became  ready 
buyers  of  American  bank  acceptances  wherewith  to  create  New  York 
funds,  selling  such  funds  in  turn  to  their  customers  who  had  debts 
to  meet  in  the  United  States.  In  this  way,  a  means  was  created  for 
the  ebb  and  flow  of  credit  transfers  between  the  United  States  and 
foreign  countries,  with  the  result  that  at  present  the  American  dollar 
is  quoted  at  all  the  principal  exchange  markets  of  the  world. 


CHAPTER  XVIII 

Bank  Acceptances 

Definition  of  bank  acceptance. — A  banker's  acceptance  is  defined  by 
the  Federal  Reserve  Board  as  "a  bill  of  exchange  of  which  the  ac- 
ceptor is  a  bank  or  trust  company,  or  a  firm,  person,  company,  or  cor- 
poration engaged  in  the  business  of  granting  banker's  acceptance 
credits." 

Trade  and  bank  acceptances  distinguished. — The  trade  acceptance 
arises  from  a  transaction  between  the  buyer  and  the  seller.  The  bank 
acceptance  is  the  result  of  the  granting  of  credit  by  a  bank  or  banker. 
The  trade  acceptance  is  accepted  by  the  buyer.  The  bank  acceptance 
is  accepted  by  the  bank  as  the  agent  of  the  buyer. 

Bank  acceptances,  how  created. — In  the  same  manner  in  which  the 
individual  or  the  firm  can  command  credit,  so  is  the  bank  capable  of 
extending  its  credit  to  its  customers,  where,  for  a  consideration,  it 
permits  its  customers  to  use  its  credit,  which  may  be  either  secured  or 
unsecured,  depending  upon  the  business  character  and  the  financial 
responsibiHty  of  the  applicant.  Bank  acceptances  herein  referred  to 
arise  out  of  commercial  transactions. 

Distinction  between  a  bank's  acceptance  and  a  bank's  note. — When 
a  member  bank  of  the  Federal  Reserve  System  accepts  a  draft  or  bill  of 
exchange  drawn  against  it,  it  enters  into  a  contract  substantially 
similar  to  that  of  the  maker  of  a  note,  so  that,  while  the  form  of  the 
instrument  differs,  the  legal  effect  is  the  same.  The  use  of  a  bank's 
acceptance,  however,  differs  from  the  use  of  its  promissory  note. 
When  a  bank  accepts  a  draft  or  bill  of  exchange  for  one  of  its  custom- 
ers, it  merely  lends  its  credit  responsibility  to  that  customer  in  order 
that  he  may  procure  the  funds  elsewhere.  The  holder  of  a  bank's 
acceptance  has  the  same  legal  rights  against  the  bank  as  the  holder 
of  its  promissory  note. 

Credit  standing  of  bank  acceptances  based  upon  bank's  credit. — 

The  degree  to  which  the  credit  value  of  bankers'  acceptances  is  meas- 

184 


Commercial  Banking  and  Credits  185 

ured  is  by  the  standing  and  credit  of  the  accepting  bank.  The  financial 
standing  of  banks  is  generally  better  known  than  that  of  individuals, 
firms,  corporations  or  others,  eliminating  to  a  great  extent  the  neces- 
sity and  inconvenience  of  investigating  the  standing  of  the  drawer  or 
the  indorsers.  The  holder  of  a  bank  acceptance  knows  that  the  ac- 
cepting bank  is  entirely  responsible.  The  holder  knows  also  that  if  the 
credit  of  the  bank  is  good,  he  need  have  no  fear  of  poor  security,  as 
the  bank  is  primarily  liable. 

Acceptances  by  member  banks  of  the  Federal  Reserve  System. — 
Under  the  provisions  of  the  Federal  Reserve  Act,  member  banks  are 
permitted  to  accept  drafts  which  have  not  more  than  six  months  to 
run,  exclusive  of  days  of  grace,  arising  out  of  one  of  the  following 
ways : — 

1.  They  must  have  originated  from  a  transaction  involving  the  im- 
portation or  exportation  of  goods. 

2.  They  must  have  arisen  from  a  transaction  involving  the  domestic 
shipment  of  goods,  and  must  have  had  shipping  documents  at- 
tached at  the  time  of  acceptance  securing  or  conveying  title  to 
the  goods. 

3.  They  must  have  been  secured  at  the  time  of  acceptance  by  a 
warehouse  receipt  or  other  such  document  conveying  or  securing 
title  to  readily  marketable  staples. 

Member  banks  may  accept  bills  of  the  classes  above  designated  up 
to  fifty  percentum  of  their  capital  and  surplus.  Where  permission  is 
obtained  from  the  Federal  Reserve  Board,  such  member  banks  may 
accept  paper  of  the  class  above  mentioned  up  to  one  hundred  per- 
centum of  their  capital  and  surplus.  Acceptances  arising  from  do- 
mestic transactions  may  not  exceed  fifty  percentum  of  the  capital 
and  surplus  of  the  bank.  The  bank  is  prohibited  also  from  accepting 
for  any  one  person,  firm,  company  or  corporation,  drafts  aggregating 
more  than  ten  percentum  of  the  capital  and  surplus  of  the  member 
bank.  But,  where  drafts  above  referred  to,  carry  with  them  the  docu- 
ments or  other  security,  the  latter  limitation  does  not  apply. 

Bills  drawn  to  furnish  dollar  exchange. — The  fourth  class  of  bank- 
ers* acceptances  comprises  bills  drawn  on  member  banks  by  banks  and 
bankers  in  foreign  countries,  for  the  purpose  of  furnishing  dollar  ex- 


i86  Bank  and  Trade  Acceptances 

change.  These  may  be  accepted  by  the  former  to  an  amount  not  in 
excess  of  fifty  percentum  of  their  capital  and  surplus,  provided  the 
maturity  of  such  drafts  is  not  more  than  three  months,  exclusive  of 
days  of  grace. 

Applications  for  privilege  of  accepting  required  to  be  filed  with 
Federal  Reserve  Bank. — Any  member  bank  with  an  unimpaired  capital 
equaling  at  least  twenty  percentum  of  its  paid-up  capital,  desiring  to 
accept  up  to  one  hundred  percentum  of  its  paid-up  and  unimpaired 
capital  stock  and  surplus,  as  above  described,  is  required  to  file  an  ap- 
plication with  the  Federal  Reserve  Board,  through  the  Federal  Reserve 
Bank  of  its  district.  The  Federal  Reserve  Bank  then  reports  the 
financial  status  of  the  applying  bank  to  the  Board  and  states  whether 
the  general  financial  conditions  in  the  district  are  such  as  to  make 
the  granting  of  the  application  advisable,  whereupon,  the  application 
is  approved  or  rejected.  The  Federal  Reserve  Board  has  also  provided 
that  any  applications  which  are  approved  may  be  rescinded  by  giving 
ninety  days'  notice  to  the  member  bank. 

Limitations  as  to  amount  which  any  one  member  bank  may  accept.— 
The  fifty  percentum  limitation  on  drafts  accepted  for  the  purpose  of 
furnishing  dollar  exchange  is  not  to  be  included  in  the  limits  placed 
by  the  Act  upon  acceptances  of  a  member  bank  of  drafts  and  bills  of 
exchange  drawn  against  the  shipment  of  goods  or  against  warehouse 
receipts  covering  readily  marketable  staples. 

Purchase  by  member  bank  of  its  own  acceptances. — Member  banks 
which  purchase  their  own  acceptances  before  maturity  are  not  required 
to  include  them  in  the  aggregate  of  acceptances  authorized  by  the 
Federal  Reserve  Act.  It  has  been  necessary  in  the  past  for  banks,  in 
order  that  the  acceptance  market  might  be  developed,  to  buy  many  of 
their  own  acceptances.  While  it  is  undesirable  in  the  opinion  of  the 
Federal  Reserve  Board  for  a  bank  to  buy  its  own  acceptances,  it  is 
essential  that  the  credit  of  the  accepting  bank  be  protected  through 
such  purchases  where  the  market  conditions  prevent  absorption.  The 
purchase  by  a  bank  of  its  own  acceptances  is  equivalent  to  a  loan  or 
advance  to  the  customer  for  whom  the  acceptance  is  made,  and  the 
liability  of  the  customer  is  subject  to  the  limitations  placed  on  loans. 
The  power  of  a  member  bank  to  accept  drafts  is  entirely  distinct  from 
the  power  to  discount  acceptances  of  others. 


Commercial  Banking  and  Credits  187 

Eligibility  of  bankers'  acceptances  for  rediscount  with  the  Federal 
Reserve  Banks. — The  term  "eligibility"  applied  to  bank  acceptances 
signifies  what  may  be  purchased  or  discounted  by  a  Federal  Reserve 
Bank.  In  order  that  it  may  be  eligible,  it  must  conform  to  all  the 
requirements  of  the  Federal  Reserve  Board. 

Rediscount  by  Federal  Reserve  Banks  of  Acceptances. — Federal  Re- 
serve Banks  may  rediscount  for  any  of  their  member  banks,  notes,  drafts 
or  bills  of  exchange,  provided  they  have  the  following  requisites : — 

1.  They  must  have  a  maturity  at  the  time  of  discount  or  not  more 
than  ninety  days,  exclusive  of  days  of  grace. 

2.  Drafts  drawn  for  agricultural  purposes  must  have  a  maturity  of 
not  more  than  six  months,  exclusive  of  days  of  grace.  Agricultural 
paper  includes  notes,  drafts,  bills  of  exchange  or  trade  acceptances, 
drawn  or  issued  for  agricultural  purposes,  or  based  on  the  sale  of  live 
stock,  and  the  proceeds  of  which  have  been  used  or  may  subsequently 
be  used  for  agricultural  purposes,  including  the  breeding,  raising, 
fattening,  or  marketing  of  live  stock. 

3.  They  must  have  arisen  out  of  actual  commercial  transactions, 
namely,  they  must  be  instruments  drawn  for  agricultural,  industrial  or 
commercial  purposes,  or  the  proceeds  of  which  are  to  be  used  for  such 
purposes. 

4.  They  must  not  have  been  issued  to  carry  on  trading  in  stocks, 
bonds  or  other  investment  securities,  except  bonds  and  notes  of  the 
United  States. 

5.  The  aggregate  of  negotiable  paper  bearing  the  signature  or  in- 
dorsement of  any  one  borrower,  whether  a  person,  firm,  company,  or 
corporation,  rediscountable  for  any  one  member  bank,  must  not  exceed 
at  any  time  ten  percentum  of  the  unimpaired  capital  and  surplus  of 
such  bank.  This  restriction,  however,  does  not  apply  to  the  discount 
of  bills  of  exchange  drawn  in  good  faith  against  actually  existing 
values. 

General  character  of  eligible  instruments. — The  Federal  Reserve 
Board  has  determined  that  instruments  themselves  to  be  eligible  for 
rediscount  at  a  Federal  Reserve  Bank  must  meet  the  following  re- 
quirements : — 

1.  They  must  be  instruments,  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  in  producing,  purchasing,  carrying,  or  marketing 
goods  in  one  or  more  of  the  steps  of  the  process  of  production. 


i88  Bank  and  Trade  Acceptances 

2.  They  must  not  have  been  used  nor  contemplated  being  used  for 
permanent  or  fixed  investments  of  any  kind,  such  as  lands,  buildings  or 
machinery. 

3.  Their  proceeds  must  not  have  been  used  nor  contemplated  being 
used  for  investments  of  a  purely  speculative  character. 

4.  They  must  be  secured  by  the  pledge  of  goods  or  collateral,  if  they 
are  otherwise  eligible. 

Applications  for  rediscount  required  from  member  banks  by  Federal 
Reserve  Bank. — Member  banks  are  required  to  make  application  for 
rediscount  to  the  Federal  Reserve  Bank,  which  will  satisfy  itself  as 
to  the  eligibility  of  the  instrument.  Member  banks  must  furnish  with 
all  applications  for  the  rediscount  of  notes,  drafts  or  bills  of  exchange, 
a  certificate,  in  form  prescribed  by  the  Federal  Reserve  Bank,  that  to 
the  best  of  their  knowledge  and  belief,  the  instruments  have  not  been 
issued  for  prohibitive  purposes. 

(For  commercial  banking  practice  under  the  Federal  Reserve  and 
acceptances,  see  Part  III.) 

The  discount  of  bankers'  acceptances. — By  the  provisions  of  the 
Federal  Reserve  Act,  Federal  Reserve  Banks  may  discount  for  mem- 
ber banks  bankers'  acceptances  having  a  maturity  at  the  time  of  dis- 
count of  not  more  than  three  months'  sight,  exclusive  of  days  of  grace, 
which  are  indorsed  by  at  least  one  member  bank  and  which  grow  out 
of  transactions  involving  the  importation  or  exportation  of  goods,  or 
which  grow  out  of  transactions  involving  the  domestic  shipment  of 
goods  where  shipping  documents  are  attached  at  the  time  of  ac- 
ceptance, or  which  are  secured  at  the  time  of  acceptance  by  a  ware- 
house receipt  or  other  such  document  conveying  or  securing  title, 
covering  readily  marketable  staples.  Federal  Reserve  Banks  may 
likewise  acquire  drafts  or  bills  of  exchange  drawn  on  member  banks  by 
banks  or  bankers  in  foreign  countries,  or  dependencies,  or  insular 
possessions  of  the  United  States  for  the  purpose  of  furnishing  dollar 
exchange. 

Eligibility  of  bankers'  acceptances. — In  order  to  be  eligible  for 
rediscount,  bankers'  acceptances  must  have  been  drawn  under  a  credit 
open  for  the  purpose  of  collecting  or  settling  accounts,  resulting  from 
transactions  involving,  (1)  the  shipment  of  goods  between  the  United 
States  and  a  foreign  country,  or  between  the  United  States  and  any  of 


Commercial  Banking  and  Credits 


189 


its  dependencies  or  insular  possessions,  or  between  foreign  countries, 
or  (2),  the  domestic  shipment  of  goods  where  shipping  documents  are 
attached  at  the  time  of  acceptance,  or  (3),  they  must  be  secured  at  the 
time  of  acceptance  by  warehouse  receipts  or  other  such  documents 
conveying  or  securing  title  covering  readily  marketable  staples,  or  (4), 
Federal  Reserve  Banks  may  acquire  bills  drawn  to  furnish  dollar  ex- 
change which  have  been  accepted  by  a  member  bank  in  accordance 
with  the  regulations  relating  to  acceptances  by  member  banks,  and 
these  bills  must  be  acquired  prior  to  the  acceptance  where  indorsed  by 
a  member  bank. 

Evidence  of  eligibility  of  bankers'  acceptances. — Federal  Reserve 
Banks  must  be  satisfied  from  the  acceptance  itself  or  otherwise,  that 
it  is  eligible  for  rediscount,  which  evidence  of  eligibility  may  consist  of 
a  stamp  or  certificate  affixed  by  the  acceptor  in  a  form  satisfactory  to 
the  Federal  Reserve  Bank,  but  no  evidence  is  required  where  a  bill  is 
accepted  by  a  national  bank. 


CHAPTER  XIX 

Procedure  of  Financing  Imports  Through  Dollar  Credits 

Dollar  Acceptances  drawn  on  National  Banks  against  imports  are  gen- 
erally drawn  against  what  is  known  as  a  Commercial  Letter  of  Credit. 
A  commercial  credit  is  an  undertaking  on  the  part  of  the  bank  to  loan  its 
credit  (not  its  funds)  to  a  customer.  The  customer,  who  is  the  original 
recipient  of  this  extension  of  the  bank's  credit,  utilizes  it  by  making  it 
available  in  favor  of  the  foreign  shipper.  He,  therefore,  requests  the  bank 
to  notify  the  shipper  that  the  latter  may  draw  on  the  bank,  up  to  a  certain 
amount  and  within  a  certain  time,  provided  certain  specified  shipping 
documents  are  attached  to  the  draft. 

For  example :  A  and  Co.  of  New  York  have  bought  from  B  and  Co. 
in  Buenos  Aires,  forty-eight  bales  of  wool  at  thirty  cents  a  pound,  cost 
and  freight  New  York ;  marine  and  war  risk  to  be  covered  by  A  and  Co. 
in  New  York,  at  their  own  expense.  As  this  contract  is  subject  to  the 
opening  of  a  ninety  days'  sight  bank  credit,  A  and  Co.  file  with  their  New 
York  bank  the  proper  application  for  a  commercial  credit.  (This  applica- 
tion is  to  the  following  effect.) 

APPLICATION  FOR 
COMMERCIAL  LETTER  OF  CREDIT 

The Bank 

Foreign  Department 

New  York  City  19 

Gentlemen : 

Buenos  Aires 
Please  open  a  confirmed  documentary  credit  by  mail  on 


(name  of  city) 
Ourselves  about  $16,000.00 

for  account  of not  to  exceed  the  sum  of 

(purchaser) 
B    and  Company,  Buenos  Aires  Full 

in  favor  of available  by  drafts  for 

(shipper) 
90   days 

invoice  value  drawn  at sight  covering  ship- 

( specify  time) 
48  bales  of  wool  at  30  cents  per  lb. 

ments)  of — 

Cost  and  freight,  New  York 

New  Yorls 

to 

(destination) 

against  delivery  of  the  following  documents : 

190 


Commercial  Banking  and  Credits  191 

Invoice,  Consular  Invoice,  Bills  of  Lading  to  the  order  of 


The Bank 


Marine 

War  risk  |  insurance  is  to  be  covered  by  ourselves  in  N.  T. 

(shipper  or  purchaser) 

Credit  to  be  available  until 19- 

( state  expiration  of  time) 

Special  Instructions; 


Bills  of  Lading  Must  Show  Freight  Prepaid 


Yours  truly 

B    and  Company 

The  bank,  having  passed  favorably  on  the  application,  thereupon  issues 
its  "Letter  of  Credit"  in  favor  of  B  and  Co.  (Form  of  Letter  of  Credit 
follows.) 

FORM  OF  LETTER  OF  CREDIT 

LETTER  OF  CREDIT  NO 

New  York  February  i6th  1920 
Messrs.  B.  &  Company 
Buenos  Aires 
Argentina 

Gentlemen : 

We  hereby  authorize  you  to  value  on  us  at  ninety  days'  sight  for  account 
of  Messrs.  A.  &  Company,  New  York,  for  any  sums  not  exceeding  in  the 
aggregate  amount  of 

U.  S.  $16,000. 
Sixteen  Thousand  Dollars  U.  S. 
Currency, 
against  shipment  of  eight  bales  of  Wool  at  30c  per  pound  cost  and  freight 

New  York. 

Full  set  of  bills  of  lading  for  such  shipment  made  out  to  the  order  of 

the Bank,  together  with  invoice  and  consular  invoice, 

must  accompany  draft.     Marine  and  war  risk  insurance  are  covered  in 
New  York.    Bills  of  lading  must  show  freight  paid. 

All  drafts  drawn  against  this  credit  to  be  drawn  and  negotiated  on  or 
after  (date)  and  to  contain  the  clause 

"Drawn  under  your  letter  of  credit  No " 

The  amount  so  drawn  is  to  be  endorsed  on  this  letter  of  credit. 

We  hereby  agree  that  such  drafts  as  you  may  draw  by  virtue  of  this 
credit,  and,  in  accordance  with  the  above  bills,  shall  be  accepted  on  presen- 
tation and  paid  at  maturity. 

Yours  respectfully, 

Bank 


192  Bank  and  Trade  Acceptances 

A  and  Co.,  upon  receiving  the  instrument,  forward  it  by  mail  to  B 
and  Co.  in  Buenos  Aires,  or,  if  necessary,  have  its  contents  communicated 
to  the  beneficiaries  through  the  bank  by  cable. 

In  order  to  protect  the  Bank,  A  and  Co.  sign  an  agreement  as  follows : 

New  York, 19 

To  the 

Bank  of  the  City  of  New  York 

Gentlemen : 

Letter  of  Credit  having  been  issued  at  (my  or  our)  request  of  which 
a  true  copy  is  on  the  other  side,  (I  or  we)  hereby  agree  to  its  terms,  and 
in  consideration  thereof  (I  or  we)  agree  with  you  to  provide  in  New  York, 
one  day  previous  to  the  maturity  of  the  bills  drawn  in  virtue  thereof, 

sufficient  funds  in  cash,  to  meet  the  payment  of  the  same  with 

per  cent  commission,  and  (I  or  we)  undertake  to  insure  or  have  insured 
at  (my  or  our)  expense,  for  your  benefit,  against  risk  of  Fire,  Sea  and 
War,  all  property  purchased  or  shipped  pursuant  to  said  Letter  of  Credit, 
in  Companies  satisfactory  to  you. 

(I  or  we)  agree  that  the  title  to  all  property  which  shall  be  purchased 
or  shipped  under  the  said  Credit,  the  bills  of  lading  thereof,  the  policies 
of  insurance  thereon  and  the  whole  of  the  proceeds  thereof,  shall  be  and 
remain  in  you  until  the  payment  of  the  bills  referred  to  and  of  all  sums 
that  may  be  due  or  that  may  become  due  on  said  bills  or  otherwise,  and 
until  the  payment  of  any  and  all  other  indebtedness  and  liability  now  ex- 
isting or  now  or  hereafter  created  or  incurred  by  (me  or  us)  to  you  on 
any  and  all  other  transactions  now  or  hereafter  had  wuth  you,  with  author- 
ity to  take  possession  of  the  same  and  to  dispose  thereof  at  your  discretion 
for  your  reimbursement  as  aforesaid,  at  public  or  private  sale,  without 
demand  or  notice,  and  to  charge  all  expenses,  including  commission  for 
sale  and  guarantee. 

Should  the  market  value  of  said  merchandise  in  New  York,  either  be- 
fore or  after  its  arrival,  fall  so  that  the  net  proceeds  thereof  (all  expenses, 
freight,  duties,  etc.,  being  deducted)  would  be  insufficient  to  cover  your 
advances  thereagainst  with  commission  and  interest,  (I  or  we)  further 
agree  to  give  you  on  demand  any  further  security  you  may  require,  and 
in  default  thereof  you  shall  be  entitled  to  sell  said  merchandise  forthwith, 
or  to  sell  "to  arrive,"  irrespective  of  the  maturity  of  the  acceptances  un- 
der this  Credit,  (I  or  we)  being  held  responsible  to  you  for  any  deficit, 
which  (I  or  we)  bind  and  oblige  (myself  or  ourselves)  to  pay  you  in  cash 
on  demand. 

In  case  (I  or  we)  should  hereafter  desire  to  have  this  Credit  confirmed, 
altered  or  extended  by  cable  (which  will  be  at  (my  or  our)  expense  and 
risk),  (I  or  we)  hereby  agree  to  hold  you  harmless  and  free  from  re- 
sponsibility for  such  confirmation,  alteration  or  extension  and  from  er- 
rors in  cabling,  whether  on  the  part  of  yourselves  or  your  Agents,  here  or 
elsewhere,  or  on  the  part  of  the  cable  companies. 


Commercial  Banking  and  Credits  193 

This  obligation  is  to  continue  in  force,  and  to  be  applicable  to  all  transac- 
tions, notwithstanding  any  change  in  the  composition  of  the  firm  or  firms, 
parties  to  this  contract  or  in  the  user  of  this  credit,  whether  such  change 
shall  arise  from  the  accession  of  one  or  more  new  partners,  or  from  the 
death  or  secession  of  any  partner  or  partners. 

It  is  understood  and  agreed  that  if  the  documents  representing  the 
property  for  which  the  said  Credit  has  been  issued  are  surrendered  under 

a  trust  receipt,  collateral  security  satisfactory  to  the 

Bank  of  the  City  of  New  York,  such  as  stocks,  bonds,  warehouse  receipts 

or  other  security,  shall  be  given  to  the Bank  of 

the  City  of  New  York,  to  be  held  until  the  terms  of  the  Credit  have  been 
fully  satisfied  and  subject  in  every  respect  to  the  conditions  of  this  agree- 
ment. 

It  is  further  understood  and  agreed  in  the  event  of  any  suspension,  or 
failure,  or  assignment  for  the  benefit  of  creditors  on  (my  or  our)  part, 
or  of  the  non-payment  at  maturity  of  any  acceptance  made  by  (me  or  us), 
or  of  the  nonfulfillment  of  any  obligation  under  said  Credit  or  under  any 

other  Credit  issued  by  the Bank  of  the  City  of 

New  York  on  (my  or  our)  account,  or  of  any  indebtedness  or  liability  on 
(my  or  our)  part  to  you,  all  obligations,  acceptances,  indebtedness  and 
liabilities  whatsoever  shall  thereupon,  at  your  option  then  or  thereafter 
exercised,  without  notice,  mature  and  become  due  and  payable. 

It  is  understood  and  agreed  that  you  shall  not  be  held  responsible  for  the 
correctness  or  validity  of  the  documents  representing  shipment  or  ship- 
ments, nor  for  the  description,  quantities,  quality  or  value  of  the  mer- 
chandise declared  therein. 


B  and  Co.  in  Buenos  Aires,  upon  receiving  the  credit,  and  having  as- 
certained that  the  terms  of  the  credit  agree  with  the  terms  of  sale,  place 
the  shipment  aboard  steamer,  prepaying  the  freight  according  to  contract, 
and  taking  out  the  bill  of  lading  in  the  name  of  the  New  York  bank,  ac- 
cording to  the  terms  of  the  credit.  B  and  Co.  then  draw  up  their  draft  for 
the  invoice  amount.  (For  form  of  a  draft  used  for  similar  purpose,  see 
Part  IV.) 

To  this  draft  arc  attached  the  invoice,  consular  invoice  and  full  set  of 
bills  of  lading.  B  and  Co.  take  these  to  their  banker  in  Buenos  Aires, 
producing  at  the  same  time  the  Letter  of  Credit  of  the  New  York  bank. 
The  Buenos  Aires  banker  thereupon  buys  the  draft  with  the  documents 
attached,  at  the  current  rate  for  bank  drafts  at  ninety  days  sight  on  New 
York,  paying  B  and  Co.  the  equivalent  in  Argentine  currency. 

B  and  Co.  get  a  high  price  for  their  dollar  draft,  because : 

I.  The  discount  for  the  ninety  days,  which  the  draft  has  to  run  after 
it  is  accepted,  is  figured  according  to  the  New  York  discount  market. 


194  Bank  and  Trade  Acceptances 

which  on  the  average  is  likely  to  be  considerably  below  that  of  any  other 
money  center. 

2.  No  bill  stamp  is  charged  in  New  York,  as  is  the  case  in  London  or 
the  continent. 

B  and  Co.,  the  shippers,  having  knowledge  of  these  advantages,  are 
therefore  able  to  quote  to  A  and  Co.  a  lower  selling  price  for  the  mer- 
chandise than  would  have  been  possible  had  A  and  Co.  offered  a  pound 
sterling  or  other  credit.  In  other  words,  the  American  importer  is  enabled 
to  derive  the  full  benefit  growing  out  of  the  use  of  the  dollar  credit. 

The  Buenos  Aires  banker  in  the  meantime  has  forwarded  the  draft  and 
documents  to  his  New  York  correspondents,  who,  upon  arrival, 
present  them  to  the  drawee  bank  for  acceptance.  The  latter,  upon  verify- 
ing the  draft  and  documents  with  the  terms  of  the  credit,  "accepts"  the 
draft  by  affixing  its  stamp  and  signature  and  returns  the  same  to  the  party 
that  presented  it,  retaining,  however,  the  shipping  documents.  (For  form 
of  accepted  banker's  draft  used  for  similar  purpose,  see  Part  IV.) 

The  presenting  bank  either  holds  the  draft  until  maturity  or  discounts 
it  in  the  open  market,  in  accordance  with  the  instructions  of  the  South 
American  banker.  In  the  meantime,  the  steamer  carrying  the  wool  has 
arrived,  and  A  and  Co.  request  delivery  of  the  shipping  documents  in  order 
to  enable  them  to  make  custom  house  entry  and  take  possession  of  the 
goods.  It  will  be  readily  understood  that  by  giving  up  the  shipping  docu- 
ments the  New  York  bank  is  giving  up  its  only  collateral.  The  bank's 
interest  must  be  protected,  and  the  documents  are  therefore  surrendered 
against  cash,  under  rebate  for  the  unexpired  time  the  draft  has  to  run,  or 
against  approved  security ;  or,  if  the  client  is  of  good  financial  and  moral 
standing  and  has  the  confidence  of  the  bank,  against  what  is  called  a 
"Trust  Receipt."    (See  Form  of  "Trust  Receipt,"  Part  IV.) 

According  to  the  Trust  Receipt  the  customer  is  obligated  to  hold  the 
goods  in  trust  for  the  bank,  and,  when  sold,  to  turn  the  proceeds  over  to 
the  bank  immediately  upon  collection  of  the  money,  which  is  to  be  used 
in  liquidation  of  the  amount  of  the  acceptance.  As  we  have  seen  from 
the  "Agreement,"  the  money  to  meet  the  acceptance  must  be  paid  to  the 
accepting  bank  at  the  latest  one  day  before  the  maturity  of  the  draft. 
By  that  time  (after  ninety  days)  the  goods  have  usually  been  disposed  of, 
and  these  acceptances  are  therefore  essentially  self-liquidating. 

THE  FINANCING  OF  IMPORTS  THROUGH  DOLLAR 

ACCEPTANCES 

The  dollar  acceptance  has  established  itself  formally  in  the  estimation 
of  the  American  importer  and  exporter,  and  has  taken  a  leading  position 


Commercial  Banking  and  Credits  195 

in  the  world's  credit  markets.  Formerly,  the  American  merchant  was 
required  to  pay  to  the  London  banker  a  handsome  commission  for  the 
latter's  services  in  the  financing  of  his  foreign  trade  transactions.  Not 
only  was  this  operation  costly  in  the  respective  commissions,  but  it  also 
entailed  a  good  deal  of  lost  time  on  the  part  of  the  American  merchant, 
for  if  he  desired  a  sterling  credit,  he  found  it  necessary  to  establish  one 
in  most  cases  through  the  medium  of  an  American  bank.  This  entailed 
a  good  deal  of  lost  motion  as  well.  Besides,  the  commission  which  he  was 
required  to  pay  for  this  service  to  compensate  the  American  as  well  as  the 
English  bank  on  which  the  credit  was  drawn,  must  have  been  sufficient  for 
both.  In  other  words,  the  importer  by  availing  himself  of  sterling  credits, 
was  required  to  pay  two  commissions.  The  dollar  credit  eliminates,  for 
the  benefit  of  the  importer,  the  wastage  of  time  and  of  money,  for  he 
deals  with  only  one  bank  and  is  required  to  pay  but  one  commission,  and 
besides,  the  time  required  to  consummate  the  financial  arrangement  is  far 
less  than  is  the  case  under  sterling  credits. 

ELIMINATION  OF  RISK  IN  EXCHANGE 

Under  the  system  of  foreign  credits,  the  American  importer  assumes 
the  risk  at  all  times  incident  to  the  fluctuation  of  exchanges.  Assume  that 
the  importer  has  made  arrangements  for  the  establishment  of  a  credit 
available  to  his  correspondent  at  a  distant  point,  and  that  sometime  later, 
the  obligation  becomes  due  and  payable  at  the  bank.  Suppose  the  rate 
of  exchange  has  in  the  meantime  risen  to  a  considerable  figure  over  and 
above  the  rate  prevailing  at  the  time  the  credit  was  arranged  for.  The 
importer  is  therefore  required  to  carry  this  risk  at  all  times,  the  result  of 
which  in  many  cases  deprives  him  not  only  of  his  profits  but  of  his  in- 
vestment in  the  transaction  as  well.  In  the  case  of  an  acceptance  in  for- 
eign money,  the  risk  of  exchange  is  an  all  important  factor  in  view  of  the 
extreme  fluctuations  to  which  the  exchanges  are  sometimes  subject.  In 
availing  himself  of  the  dollar  acceptance  method,  the  American  importer 
knows  exactly  what  his  goods  cost  him  and  there  is  no  ambiguity  as  to 
how  much  money  he  owes  his  bank  at  the  time  the  acceptance  falls  due. 
He  can  then  operate  with  assurances  of  success. 

BENEFIT  OF  THE  MONEY  RATES  QUOTED  IN  THE  NEW 

YORK  MARKET 

As  a  result  of  the  war  and  the  development  of  the  bank  acceptance  in 
this  country,  a  discount  market  for  this  class  of  paper  has  been  created 
with  ever  increasing  demands  for  the  same  as  an  item  of  investment  and 


196  Bank  and  Trade  Acceptances 

as  an  equalizer  of  the  cash  and  investment  positions  of  banks.  Due  to 
these  facts,  the  money  rates  quoted  in  the  New  York  market  are  on  the 
average  Hkely  to  be  lower  than  those  of  other  money  centers.  This  also  is 
an  important  fartor  to  the  importer  in  this  country  for  he  then  may  have 
the  use  of  the  money  at  an  economical  expense. 

ADVANTAGES  OF  DIRECT  SERVICE 

The  American  importer  in  this  connection  is  able  to  spare  himself  from 
the  contingencies  frequently  arising  in  connection  with  foreign  shipments, 
such  as  short  weights,  losses,  damages,  etc..  If  it  should  happen  that  they 
occur,  they  may  be  adjusted  more  properly,  cheaply  and  effectively  be- 
tween the  American  banker  and  the  foreign  shipper  or  his  bank,  than  if 
such  adjustments  had  to  be  made  via  the  London  banker  as  would  be 
necessary  in  using  a  sterling  credit.  At  the  present  time  this  convenience 
is  of  exceptional  importance  to  the  American  importer  as  the  abnormal 
fluctuation  in  prices  for  all  kinds  of  merchandise  makes  or  unmakes  a  deal, 
according  to  the  promptness  with  which  the  bank  is  able  to  support  the 
transaction  on  behalf  of  the  importing  merchant.  This  is  an  advantage 
of  dealing  directly  and  in  which  the  elimination  of  a  second  intermediary 
party  cuts  out  time  and  trouble  otherwise  incurred. 

ECONOMIC  VALUE  TO  THE  NATION  ARISING  FROM  THE 

USE  OF  DOLLAR  CREDITS 

Quite  apart  from  the  direct  economy  to  the  individual  resulting  from 
the  use  of  the  dollar  credit  is  the  broader  question  of  the  economic  value 
accruing  to  the  nation  as  a  whole  through  the  designation  of  the  dollar 
as  the  basis  of  value  in  our  credit  transactions  with  the  rest  of  the  world. 
The  volume  of  our  imports  during  the  past  decade  has  increased  rapidly. 
Before  1900,  the  total  of  our  imports  amounted  to  less  than  one  billion 
dollars.  The  volume  today  has  risen  to  from  three  to  four  billion  dollars. 
Included  in  the  imports  are  products  from  all  parts  of  the  world  shipped 
direct  to  our  own  shores,  and  while  no  nation  enjoys  higher  international 
credit  than  the  United  States,  yet  it  is  a  fact,  that  in  order  to  finance  the 
movement  of  our  imports,  we  have  been  compelled  to  have  recourse  to 
indirect  channels  and  call  on  foreign  money  centers  to  furnish  us  with 
the  necessary  credit  facilities  to  take  care  of  a  large  part  of  our  imports. 
For  this  accommodation,  the  American  merchant  has  had  to  pay  millions 
of  dollars  annually,  in  interest,  commissions  and  other  charges.     Today, 


Commercial  Banking  and  Credits  197 

with  the  general  adoption  of  the  dollar  credit  and  its  more  extended  use, 
these  charges  can  be  saved  and  an  economy  effected  to  the  benefit  of  our 
commerce  as  a  whole. 

At  no  time  in  the  economic  history  of  the  United  States  has  the  pur- 
chasing power  of  the  dollar  in  foreign  markets  been  greater  than  it  is 
today  because  of  the  varying  premium  which  the  dollar  commands  at 
present,  practically  throughout  the  world.  The  time  is  present  to  increase 
the  prestige  of  the  dollar  and  to  standardize  its  use  in  the  liquidation  of 
our  direct  purchases  abroad.  To  this  end,  the  co-operation  of  the  mer- 
chants of  the  country  and  of  the  bankers  to  extend  the  use  of  dollar 
credits  is,  therefore,  necessary. 


CHAPTER  XX 
Procedure  of  Financing  Exports  Through  Dollar  Acceptances 

The  procedure  of  financing  exports  through  the  medium  of  Dollar 
Acceptances  differs  somewhat  from  that  of  financing  imports. 

Assume  that  a  foreign  buyer  has  bought  goods  in  the  United  States. 
The  American  exporter  who  has  sold  the  goods,  demands  a  bank 
credit  against  which  he  can  draw  when  shipment  has  been  effected. 
The  buyer  abroad  accordingly  arranges  with  his  local  bank  for  the 
credit,  and  the  foreign  bank,  in  turn,  requests  its  New  York  bank 
correspondent  to  open  a  credit  in  favor  of  the  American  shipper, 
available  by  the  latter's  ninety  days'  sight  drafts  on  the  New  York 
bank,  such  drafts  to  be  accompanied  by  certain  shipping  documents 
which  are  specified. 

The  American  shipper,  after  having  effected  shipment  and  secured 
the  bill  of  lading  and  other  documents  required,  draws  his  draft  and 
presents  the  latter  to  the  New  York  bank  for  acceptance,  together  with 
the  required  shipping  papers.  The  New  York  bank  "accepts"  the 
draft,  to  fall  due  in  ninety  days,  and  returns  the  accepted  draft  to  the 
shipper,  forwarding  the  shipping  documents  by  first  mail  to  the  foreign 
bank. 

The  foreign  bank  turns  these  documents  over  to  its  client,  the  buyer  of 
the  goods,  against  such  security  as  it  may  see  fit.  Funds  to  meet  the 
acceptance  on  the  due  date  are  guaranteed  and  furnished  by  the  foreign 
bank  to  the  New  York  bank. 

In  the  mean  time,  the  American  shipper,  who  now  holds  a  "Bank  Ac- 
ceptance," in  payment  of  his  shipment,  either  discounts  that  acceptance 
with  his  own  bank,  or  sells  it  in  the  open  market  at  what  is  called  "the 
ruling  rate  for  member  bank  acceptances,"  thus  receiving  his  money. 

The  advantages  of  the  Dollar  Acceptance  in  this  case  are  obvious.  The 
foreign  buyer  wants  ninety  days'  time  at  the  lowest  cost ;  this  the  Ameri- 
can seller  gives  him.  Knowing  that  he  can  sell  the  acceptance  which 
he  receives  from  the  New  York  bank  at  the  lowest  possible  rate,  the 
seller  adds  only  a  small  percentage  to  his  selling  price  to  cover  this  dis- 
count.    The  American  seller  is  thus  enabled  to  quote  lower  prices  now 

198 


Commercial  Banking  and  Credits  199 

than  at  any  time  before  the  passage  of  the  Federal  Reserve  Act,  when 
he  was  compelled  to  draw  on  some  foreign  bank,  which  procedure  com- 
pelled him  to  add  to  his  price  a  good  margin  to  protect  himself  against 
loss  in  the  exchange,  a  higher  discount,  and  the  cost  of  the  bill  stamps. 

It  may  be  said  here  that  the  American  exporter  who  demands  a  bank 
credit  to  cover  his  sale,  is  still  too  insistent  upon  receiving  a  "sight"  credit, 
under  which  he  receives  "cash  against  documents."  If  we  are  to  remove  a 
positive  restriction  from  our  export  trade,  it  is  imperative  that  our  ex- 
porters consent  to  the  drawing  of  "long"  drafts  on  American  banks 
which  open  credits,  if  so  requested  by  the  foreign  buyers.  The  latter  want 
time  in  which  to  make  a  "turnover,"  and  this  can  easily  be  granted  by  the 
American  sellers  at  low  cost  and  little  or  no  risk.  The  excuse  of  some 
business  houses  that  they  do  not  care  to  be  contingently  liable  as  drawers 
of  these  acceptances  is  irrelevant,  since  such  contingent  liability  is  un- 
important in  view  of  the  fact  that  the  acceptors  of  these  drafts  are  strong 
banks  which  have  become  still  stronger  on  account  of  membership  in  the 
Federal  Reserve  System. 

Not  all  exports  are  covered  by  "Bank  Credits," — in  fact,  the  majority 
are  not.  Notwithstanding,  Bank  Acceptances  have  been  successfully  em- 
ployed in  the  financing  of  our  export  trade,  particularly  exports  to  South 
and  Central  America,  the  banks  paying  with  their  credit  by  giving  their 
"acceptance"  instead  of  paying  with  funds  when  purchasing  documentary 
drafts  on  those  countries. 

Bank  Acceptances  may  be  employed  in  anticipation  of  actual  exports. 
For  instance,  a  merchant  has  a  large  order  for  an  export  shipment.  He 
may,  after  having  made  proper  arrangements  with  his  bank,  draw  long 
term  drafts  on  the  latter,  and  use  the  funds  thus  created  for  the  purchase 
or  preparation  of  the  shipment.  After  the  shipment  has  been  made,  the 
draft  on  the  foreign  purchaser  or  the  foreign  purchaser's  bank,  together 
with  the  relative  shipping  documents,  may  be  handed  in  to  the  bank  for 
discount  or  collection,  the  bank  in  turn  using  the  proceeds  of  this  draft  in 
liquidation  of  the  original  acceptance. 

This  method  has  been  successfully  used  since  the  outbreak  of  the  war, 
and  due  credit  should  be  given  to  the  Federal  Reserve  Board  for  its  in- 
telligent and  practical  interpretation  of  the  law. 

DOLLAR  ACCEPTANCES 

a     "Against  domestic  shipment  of  goods,  providing  shipping  documents 
conveying  or  securing  title  are  attached  at  the  time  of  acceptance." 


:^o6  Bank  and  Trade  Acceptances 

b  "Secured  at  the  time  of  acceptance  by  zvarehouse  receipt  or  othef 
such  document  conveying  or  securing  title  covering  readily  mar- 
ketable staples." 

In  order  to  finance  his  purchases  and  take  advantage  of  the  cash  dis- 
count, the  merchant  formerly  went  to  his  bank  and  borrowed  on  his  own 
promissory  note  such  funds  as  he  required.  The  rate  of  interest  which 
he  had  to  pay  varied  according  to  the  state  of  the  money  market,  while 
the  money  market  in  turn  always  showed  the  effect  of  our  old  banking  sys- 
tem, with  its  lack  of  rediscount  facilities  and  its  consequent  tendency  to 
sudden  and  abnormal  fluctuations. 

Today,  the  merchant  who  wants  to  borrow  is  privileged  to  pursue  a 
different  course.  Let  us  take  the  case  of  a  buyer  who  has  to  meet  a  draft 
for  $50,000,  covered  by  domestic  shipping  documents. 

The  buyer,  having  made  the  proper  arrangements  with  his  bank,  au- 
thorizes the  latter  to  "accept"  the  seller's  draft  for  $50,000  drawn  upon 
the  bank — {not  upon  the  buyer),  provided  the  draft  is  accompanied  by 
certain  specified  documents,  such  as  invoices,  railroad  bills  of  lading, 
etc.  There  are  instances  when  it  is  more  practicable  that  the  customer 
himself  draw  upon  the  bank  instead  of  the  seller.  However,  the  other 
method  is  the  more  usual  one.  The  draft  is  presented  by  the  seller, 
accepted  by  the  bank  and  returned  to  the  seller.  The  documents  are 
withheld  by  the  bank  and  turned  over  to  the  customer  against  the  familiar 
trust  receipt. 

The  seller  now  has  the  "Bank  Acceptance"  for  $50,000  which  he  can 
readily  discount  in  the  open  market.  Thus,  actual  funds  are  provided 
under  competition  by  the  banking  and  investing  community  at  large. 

The  procedure  of  creating  Dollar  Acceptances  secured  by  warehouse 
receipts  or  other  documents  covering  readily  marketable  staples  does  not 
vary  materially  from  that  outlined  above,  except  that  the  customer  of  the 
bank  usually  does  not  designate  any  third  party  to  draw  the  draft  on  the 
bank,  but  draws  it  himself. 

The  advantages  of  these  acceptances  are  f our- fold: 

First  :  The  seller  receives  his  money  promptly. 

Second:  The  bank's  customer  has  obtained  his  loan  (or  rather  credit) 
at  a  lower  cost  than  by  the  use  of  his  promissory  note,  the  rate  for 
a  three  months'  promissory  note,  all  other  things  being  equal,  being 
higher  than  the  discount  rate  for  a  three  months'  Bank  Acceptance 


Commercial  Banking  and  Credits  201 

plus  acceptance  commission.  This  difference  is  eloquently  illus- 
trated by  the  different  valuation  applied  by  European  bankers  to  an 
investment  of  ready  negotiability — as  compared  with  one  that  locks 
up  the  funds  of  the  bank. 

Third:  The  bank  is  able  to  accommodate  its  customer  more  readily,  since 
it  advances  only  its  credit,  the  ultimate  buyer  of  the  Acceptance 
advancing  the  actual  money. 

Fourth  :  It  has  a  balancing  effect  on  the  money  market. 

Thus,  through  the  use  of  the  Bank  Acceptance  the  bank  can  take  care  of 
the  needs  of  its  customers  without  carrying  their  paper  in  its  portfolio. 
In  other  words,  the  bank,  in  granting  accommodations,  is  not  dependent 
upon  the  amount  of  loanable  funds  it  has  available. 


CHAPTER  XXI 

ACCEPTANCE  CORPORATIONS 
Their  Importance  to  the  Development  of  a  Discount  Market 

What  is  regarded  as  most  important  to  the  development  of  an  open 
discount  market  for  the  country  is  the  so-called  "acceptance  corpora- 
tion." Prior  to  the  passage  of  the  Federal  Reserve  Act,  the  banking 
institutions  of  this  country  operated  under  the  National  Bank  Act  or 
under  the  various  State  laws.  These  several  laws  imposed  limitations 
upon  the  activities  of  State  or  Federal  chartered  banks.  For  example, 
a  national  bank  was  prohibited  from  having  any  liabilities  in  excess 
of  its  unimpaired  capital  paid  in,  other  than  to  its  stockholders  for 
its  capital  stock,  to  its  depositors  for  its  deposits,  or  to  persons  who 
might  hold  its  notes  of  issue,  or  drafts  or  bills  drawn  against  money 
on  deposit  to  the  credit  of  the  national  bank  or  due  to  it.  State  laws 
imposed  similar  restrictions  upon  State  institutions. 

The  acceptance  of  time  drafts  drawn  upon  banks  and  payable  in  the 
United  States  was  hardly  possible,  and,  as  a  result,  letters  of  credit  to 
finance  the  importation  or  exportation  of  merchandise  were  not  issued 
by  American  banks.  Foreign  banking  business  was  financed  princi- 
pally by  the  larger  American  banking  institutions  which  maintained 
correspondents  in  the  principal  cities  abroad.  Through  these  means, 
banks  in  the  United  States  were  able  to  issue  credits  in  terms  of  for- 
eign currency. 

Prior  to  the  passage  of  the  Federal  Reserve  Act,  most  of  the  inter- 
national business  and  finance  was  carried  on  through  London,  and 
sterling  exchange  was  almost  the  exclusive  medium  used  by  the  Amer- 
ican banker  and  merchant  in  the  financing  of  their  foreign  trade. 

Introduction  of  the  American  Bankers'  Acceptance 

The  Federal  Reserve  Act  passed  in  1914,  gave  the  power  to  member 
banks  of  the  system  to  accept  drafts  drawn  upon  them  up  to  fifty  per 
cent,  of  their  capital  and  surplus,  provided  they  were  drawn  in  con- 
formity with  certain  specified  restrictions  and  limitations.     A  few  of 

202 


Commercial  Banking  and  Credits  203 

the  larger  banks  throughout  the  country  readily  took  advantage  of 
this  opportunity  and  began  issuing  dollar  credits  on  account  of  the 
advantages  and  economies  which  the  dollar  credit  offered  in  com- 
parison with  credits  issued  in  foreign  currencies.  The  importer  and 
exporter  in  this  country  readily  favored  this  means  of  financing  their 
foreign  trade  through  the  dollar  credit,  as  it  afforded  them  a  cheaper 
rate  of  commission,  and  economies  in  time  and  expense  by  dealing 
direct  and  only  with  the  American  bank. 

In  the  issuance  of  foreign  credits,  a  merchant  was  not  sure  of  the 
cost  of  his  goods  until  he  had  transacted  for  the  purchase  of  enough 
exchange  to  cover  the  draft  for  each  particular  transaction,  and  further- 
more was  compelled  to  make  payment  at  least  ten  days  or  more  before 
maturity  of  the  foreign  draft  in  order  to  enable  his  bank  to  have  funds 
in  the  hands  of  its  foreign  correspondent  at  the  date  of  maturity. 
Another  way  in  which  he  could  place  funds  in  the  hands  of  the  bank 
in  the  country  where  the  credit  was  issued  was  by  means  of  "cabling" 
the  sum  at  his  own  expense,  say  two  days  or  so  before  maturity. 

By  using  the  dollar  credit,  the  American  merchant  is  always  as- 
sured of  the  prices  of  his  goods  as  there  is  no  question  of  fluctuating 
exchanges,  for  the  merchant  pays  only  in  dollars.  The  dollar  credit 
also  saves  the  importer  interest,  and  he  pays  the  issuing  bank  the  day 
before  maturity  of  the  draft. 

During  the  war,  on  account  of  high  interest  rates  in  European  cen- 
ters, bank  acceptances  became  more  favorable  and  the  value  of  dollar 
credits  issued  rapidly  increased.  Dealings  in  bank  acceptances  pro- 
gressed to  such  a  point  that  the  few  banks  who  were  issuing  them 
soon  found  that  the  demands  of  their  customers  could  not  be  met  under 
the  restrictions  imposed  by  the  Federal  Reserve  Board.  An  amend- 
ment was,  therefore,  passed  to  the  Act  permitting  member  banks 
under  certain  conditions  prescribed  by  the  Federal  Reserve  Board,  to 
accept  up  to  one  hundred  per  cent,  of  their  capital  and  surplus  instead 
of  fifty  par  cent.,  which  was  the  original  limit.  Even  these  increased 
facilities,  favoring  the  acceptance  powers  of  the  member  banks  were 
soon  found  to  be  inadequate  and  the  demand  for  American  dollar 
credits  soon  exceeded  the  supply.  The  Board  at  Washington  quickly 
realized  that  if  the  banks  of  this  country  were  going  to  finance  the 
importation  and  exportation  of  merchandise  to  and  from  the  United 
States,  some  substantial  enlargement  of  their  facilities  would  have  to 
be  granted. 


204  Bank  and  Trade  Acceptances 

The  Rise  of  Acceptance  Corporations 

In  1916,  an  amendment  was  passed  to  the  Federal  Reserve  Act, 
allowing  member  banks  to  invest  up  to  ten  per  cent,  of  their  capital 
and  surplus  in  corporations  organized  to  do  a  foreign  or  international 
banking  business,  and  a  number  of  such  corporations  have  been  organ- 
ized as  a  result  of  this  amendment.  They  specialize  in  the  issuance  of 
dollar  credits  and  in  the  acceptance  of  drafts  drawn  upon  them. 

The  Federal  Reserve  Board  has  imposed  various  restrictions  upon 
the  operations  of  these  discount  corporations,  which  may  be  enumer- 
ated as  follows : 

1.  They  are  not  permitted  to  receive  domestic  deposits,  though 
they  may  receive  deposits  which  are  incidental  to  the  carrying  out 
of  transactions  in  foreign  countries  or  dependencies  of  the  United 
States. 

2.  Against  such  deposits,  a  reserve  must  be  obtained,  which  cor- 
responds to  that  required  of  member  banks  located  in  central 
reserve  cities. 

3.  They  may  accept  drafts  and  bills  of  exchange  for  all  trans- 
actions permissible  to  member  banks  under  provisions  of  the  Fed- 
eral Reserve  Act,  but  are  obliged  to  make  no  acceptance  for  ac- 
count of  any  one  drawer  at  any  time  in  amounts  in  excess  of  ten 
per  cent,  of  their  subscribed  capital  and  surplus,  unless: 

(a)  The  transaction  is  fully  secured,  or, 

(b)  Arises  from  the  exportation  or  importation  of  mer- 
chandise, and 

(c)  Is  guaranteed  by  a  bank  or  banker  of  undoubted 
solvency. 

4.  Whenever  the  aggregate  of  acceptances  of  any  one  corpora- 
tion outstanding  at  any  time  exceeds  the  amount  of  its  capital  and 
surplus,  fifty  per  cent,  of  all  acceptances  in  excess  of  such  amount 
shall  be  fully  secured. 

5.  Whenever  the  aggregate  of  such  acceptances  exceeds  twice 
the  amount  of  the  subscribed  capital  and  surplus,  all  acceptances 
outstanding  in  excess  of  such  amount  shall  be  fully  secured,  which- 
ever of  said  two  requirements  shall  call  for  the  smaller  amount  of 
secured  acceptances. 

6.  The  aggregate  of  all  acceptances  outstanding  plus  the  total 
of  all  deposits  held  by  any  corporation  must  not  exceed  six  times 
the  amount  of  that  corporation's  capital  and  surplus,  except  with 
the  approval  of  the  Federal  Reserve  Board. 

7.  Discount  corporations  are  required  to  maintain  a  reserve  of 
at  least  fifteen  per  cent,  in  liquid  assets  as  security  for  all  out- 
standing acceptances,  which   reserve  shall  consist  of  cash  bal- 


Commercial  Banking  and  Credits  205 

ances    with    other   banks,   bankers'   acceptances,    or    such    secur- 
ities as  the  Board  may  from  time  to  time  permit. 

8.  These  corporations  are  required  to  make  two  reports  an- 
nually to  the  Federal  Reserve  Board,  covering  such  details  of 
their  operations  as  may  be  prescribed  and  as  subject  to  such  ex- 
aminations as  the  Board  may  order. 

Regarding  "6"  above  given,  the  Federal  Reserve  Board  has  already 
in  some  cases  given  permission  to  acceptance  corporations  to  create  ac- 
ceptances to  the  extent  of  twelve  times  their  capital  and  surplus.  The 
ratio  of  liabilities  on  account  of  deposits  and  acceptances,  therefore,  is 
twelve  to  one,  a  figure  which  is  quite  on  a  parity  with  some  of  the 
largest  and  strongest  banks  in  this  country.  Out  of  an  increased  de- 
mand for  dollar  acceptances  and  dollar  credits  and  out  of  the  inability 
of  the  existing  banks  to  supply  the  demand,  the  acceptance  corporation 
came  into  being. 

Creation  of  New  Acceptance  Corporations 

Since  the  amendment  to  the  Federal  Reserve  Act  permitting  na- 
tional banks  to  hold  stock  in  such  corporations,  a  very  rapid  develop- 
ment in  the  formation  of  acceptance  corporations  has  been  the  result. 
A  number  of  these  corporations  have  been  organized  and  are  to-day 
conducting  business  in  the  various  large  financial  centers  of  the 
country.  Their  principal  functions  are  the  development  and  exten- 
sion of  foreign  trade  and  the  establishment  of  branches  in  foreign 
countries. 

The  policy  of  the  Federal  Reserve  Board  in  this  connection,  has 
therefore  been  a  very  wise  one,  as  it  places  at  the  disposal  of  the  Amer- 
ican importer  and  exporter,  through  these  acceptance  corporations,  a 
means  of  securing  dollar  credits  with  numerous  advantages  which  they 
afford  over  other  credits  controlled  by  other  exchange  markets.  The 
acceptances  of  these  corportions  sell  in  the  open  market  at  varying 
rates  of  from  one-sixteenth  to  three-sixteenths  per  cent,  higher  than  the 
acceptance  of  prime  member  banks. 

The  discount  corporations  that  have  been  organized  and  the  various 
banks  that  have  been  instrumental  in  the  development  of  the  bank 
acceptance  and  dollar  credits  in  this  country  have  realized  the  neces- 
sity of  creating  a  discount  market  similar  to  those  of  the  European 
nations.  Under  present  conditions,  the  ultimate  market  for  most  of 
the  bankers'  acceptances  is  the  Federal  Reserve  Banks.     During  the 


2o6  Bank  and  Trade  Acceptances 

war,  with  the  problems  of  Government  financing  on  short  term  obli- 
gations at  attractive  rates,  and  the  system  of  call  money  lending  to 
which  banks  and  the  investing  classes  still  adhere,  there  has  not  been 
afforded  a  maximum  of  assistance  to  the  development  of  an  open  dis- 
count market.  Conditions  of  this  nature,  however,  cannot  be  expected 
to  continue,  for  the  time  will  surely  come  when  Government  obliga- 
tions will  be  cancelled  to  a  large  degree.  These  will  have  to  be  filled 
by  some  other  form  of  high  grade  investment — not  only  from  the 
standpoint  of  the  individual  but  of  the  business  man,  and  particularly, 
the  bank. 

Effect  of  Call  Loan  System  to  Acceptance  Growth 

The  most  serious  cause  retarding  the  development  of  an  open  dis- 
count market  for  the  country  is  as  heretofore  mentioned  the  call  loan 
system.  Most  of  the  larger  banks,  because  of  the  higher  yield  from 
this  class  of  loan,  are  tempted  to  continue  to  carry  their  reserves  in 
this  way,  instead  of  in  prime  commercial  paper  of  the  class  of  bankers* 
and  trade  acceptances.  The  country  banks,  too,  find  it  more  profitable 
to  transmit  their  funds  to  the  larger  cities  to  be  loaned  out  at  call 
money  rates.  Since  call  money  rates  have  on  the  average  been  high, 
banks  have  clung  to  this  form  of  investment. 

The  development  of  a  wide  discount  market  in  bank  and  trade 
acceptances  will  not  only  supply  a  means  of  investment  to  the  banks 
of  the  country  for  their  resources,  but  will  tend  to  put  buyer  and  seller 
of  funds  together,  because  of  the  investment  advantages,  and  so  make 
demands  meet  supply. 

No  better  basis  for  a  discount  market  could  be  selected  than  the 
acceptance,  representing  as  it  does,  paper  of  the  highest  class,  and 
carrying  evidence  upon  its  face  of  a  commercial  transaction  which 
gave  it  birth. 

But  to  this  plan,  the  cooperation  of  the  banker,  the  business  man, 
and  the  investor  is  necessary.  Realizing  their  advantages,  encourage- 
ment in  the  use  of  acceptances  should  always  be  forthcoming  by  the 
commercial  and  financial  interests  of  the  country. 

The  New  Edge  Act  for  Foreign  Financing 

Of  very  great  importance  to  the  clarification  and  strengthening  of 
the  position  of  these  acceptance  corporations,  it  is  hoped  will  be  the 


Commercial  Banking  and  Credits 


207 


so-called  Edge  Act,  passed  December  24,  1919,  the  principles  of  which, 
together  with  the  text  of  the  law,  are  given  in  Part  V  of  the  present 
work.  On  the  whole,  it  is  the  opinion  that  these  acceptance  corpora- 
tions will  grow  to  be  among  the  most  powerful  institutions  which  the 
country  has  and  will  materially  assist  in  strengthening  our  position  in 
international  as  well  as  domestic  finance  and  trade. 


CHAPTER  XXII 

THE  DEVELOPMENT  OF  AN  OPEN  DISCOUNT  MARKET 

The  Importance  of  Acceptances  and  High  Grade  Commercial  Paper 

TO  the  Maintenance  of  a  System,   Which   More  Than 

Anything  Else,  Furnishes  a  Basis  for  Establishing 

the  National  Ideal  of  a  Liquid  Currency 

The  introduction  of  the  Fereral  Reserve  System  prepared  the  way 
for  the  re-introduction  of  the  trade  acceptance  and  for  the  creation  of 
the  bank  acceptance  in  this  country,  and  established  an  open  discount 
market  for  high  grade  commercial  paper. 

The  expression  "open  market"  was  one  with  which  comparatively 
few  bankers  in  the  country  were  familiar  at  the  time  of  the  passage 
of  the  Act.  They  were  acquainted  with  existing  methods  as  previously 
used  and  were  satisfied  with  them.  They  did  not  desire  any  central 
authority  to  regulate  their  operations,  as  they  believed  the  Federal 
Reserve  Board  would  do. 

The  Act,  the  passage  of  which  was  the  result  of  a  time-worn  call 
for  banking  reform,  had  as  its  ultimate  purpose  the  establishization  of 
a  sound  financial  credit  system. 

This,  the  Board  sought  to  bring  about  through  the  standardization 
of  commercial  paper,  according  to  the  nature  of  their  origin,  and  by 
the  selection  of  the  best  classes  of  such  paper,  to  create  a  continuous 
market  for  them.  The  purpose  of  the  present  chapter  is  to  outline  the 
essential  features  of  an  open  discount  market  and  the  advantages  of 
such  a  market  to  the  commercial,  financial  and  public  interests  of  the 
country. 

FUNCTIONS  OF  THE  DISCOUNT  MARKET 

The  Open  Discount  Market 

Importance  of  a  Discount  Market  to  Efficient  Banking  System 

The  mobility  of  reserves  is  a  necessary  complement  of  a  good  bank- 
ing system.    The  European  countries  have  found  from  experience  that 

208 


Commercial  Banking  and  Credits  209 

the  efficiency  of  their  banking  systems  is  dependent  mainly  upon  the 
maintenance  of  a  wide  and  highly  developed  discount  market.  They 
realized  still  further  the  importance  of  such  a  discount  market  in  that 
it  could  act  as  a  regulator  of  the  banks,  as  well  as  the  countries'  cash 
and  investment  position,  and  maintain  a  state  of  liquidity  of  their 
assets. 

THE  DISCOUNT  MARKET  AS  A  RESERVOIR  OF  THE  COUN- 
TRY'S FUNDS 

A  discount  market,  for  the  reason  that  it  gathers  together  the  funds 
of  the  investing  classes  of  the  country,  viz.,  of  the  commercial,  invest- 
ing and  savings'  banks,  private  bankers,  trust  funds,  corporation  funds, 
funds  of  insurance  companies,  paper  brokerage  and  discount  houses, 
and  investors  of  all  classes,  is  capable  of  being  a  reservoir  for  the 
available  reserves  of  the  country.  Above  all,  the  banker  and  business 
man  wants  to  be  assured  that  he  can  get  money,  other  things  being 
equal,  when  he  wants  it.  If  he  knows  that  there  is  money  to  be  ob- 
tained with  ease  by  utilizing  his  commercial  paper  holdings,  he  will  be 
encouraged  to  invest  his  funds  in  standardized  commercial  paper. 

PERFORMS  FUNCTIONS  OF  BUYER  AND  SELLER 

A  discount  market  performs  the  functions  of  both  buyer  and  seller. 
It  brings  together  the  party  who  has  money  and  the  party  who  seeks 
it,  and  provides  a  means  whereby  funds  which  are  needed  may  be 
obtained,  as  well  as  gives  employment  to  such  funds.  A  discount 
market  should  be  wide  enough  to  afford  these  facilities  to  the  buyer 
and  seller  at  all  times. 

DISCOUNT  MARKET  MAKES  MOBILITY  POSSIBLE 

We  have  seen  also  that  by  the  introduction  of  the  Federal  Reserve 
System,  the  reserves  of  the  country  were  made  capable  of  transfer 
from  one  part  to  another  according  to  the  needs  of  the  localities. 
Suppose  one  Federal  Reserve  Bank  finds  itself  in  need  of  money  at 
short  notice.  It  would  then  discount  the  commercial  paper  held  by 
it  of  another  Federal  Reserve  bank,  taking  the  proceeds  by  transfer, 
thus  causing  a  flow  of  money  from  a  place  where  it  is  abundant  to  a 
place  where  it  is  needed.    The  same  is  true  as  between  bank  and  Fed- 


210  Bank  and  Trade  Acceptances 

cral   Reserve  bank,   the   latter  rediscoimting  the   commercial   paper 
holdings  of  the  former. 

EQUALIZING  INTEREST  AND  DISCOUNT  RATES  WITHIN 

THE  COUNTRY 

By  the  simple  process  of  discounting  as  above  described,  supposing 
one  locality  should  have  a  surplus  of  funds.  In  that  event,  money 
there  would  invariably  loan  out  at  a  low  rate.  On  the  other  hand,  let 
us  take  a  district  where  the  demand  for  money  exceeds  the  supply. 
Interest  rates  there  would  necessarily  be  higher.  The  total  money 
supply  would  always  tend  towards  maintaining  equilibrium,  that  is, 
the  greater  supply  of  money  would  flow  towards  the  lesser  supply  of 
money,  and  thus  rates  of  interest  in  these  two  districts  under  consider- 
ation would  thereby  be  equalized.  This  is  accomplished  by  the  dis- 
counting of  bills,  acceptances  and  other  commercial  paper,  either  be- 
tween member  banks  and  the  Federal  Reserve  Bank  or  between  the 
Federal  Reserve  banks  themselves.  Undoubtedly,  it  cannot  be  asr 
sumed  that  at  all  times  it  is  possible  to  maintain  a  market  equalized  in 
every  respect,  but  the  variance  in  the  rates  between  two  markets  can 
be  kept  so  close  to  one  another  that  its  diilerence  will  not  be  felt  so 
very  much. 

THE   DISCOUNT    MARKET   AS    AN    EQUALIZER   OF    DIS- 
COUNT RATES  BETWEEN  THE  UNITED  STATES 
AND  FOREIGN  COUNTRIES 

A  discount  market  operates  as  an  equalizer  of  discount  rates  between 
the  United  States  and  foreign  countries  in  the  same  manner  as  it  acts 
as  an  equalizer  of  rates  between  different  sections  of  this  country.  In 
the  London  discount  market,  because  of  the  facilities  provided  and  the 
opportunities  afforded  foreign  banks  for  the  investment  of  their  re- 
sources, they  have  collected  there  in  large  numbers  and  have  brought 
with  them  considerable  funds  which  are  loaned  out  in  commercial 
paper  transactions  and  so  support  the  discount  market.  It  is  believed 
by  bankers,  economists  and  authorities  on  banking  and  finance  that 
the  result  in  the  United  States  would  be  similar,  and  that  the  use  of 
acceptances  would  more  than  anything  else  contribute  to  the  develop- 
ment of  a  broad  discount  market. 


Commercial  Banking  and  Credits  211 

Interest  rates  in  two  countries  are  seldom  the  same  at  any  one  time, 
and  bankers  and  investors  seek  employment  for  their  funds  according 
to  the  higher  rate  of  interest  which  is  afforded  in  the  relative  markets. 

The  existence  of  a  broad  discount  market  in  the  United  States  would 
encourage  foreign  banks  and  investors  to  purchase  our  bills  and 
acceptances  as  an  investment  when  rates  are  higher  in  this  country 
than  abroad.  This  would  tend  to  move  our  interest  rates  in  sympathy 
with  the  level  of  interest  rates  in  foreign  countries.  Should  the  rates 
decline  in  this  country,  the  banks  and  investors  here  would  enter  for- 
eign markets  for  the  purchase  of  their  bills,  and  foreign  banks  and 
investors  would  also  reduce  their  holdings  of  American  bills,  because 
of  the  lower  rates  of  interest.  A  movement  would  thus  set  in  to  equal- 
ize rates  and  keep  them  as  nearly  on  a  par  with  each  other  as  is 
possible. 

THE  DISCOUNT  MARKET  AS  A  STABILIZER  OF  INTEREST 
RATE  LEVELS  WITHIN  THE  COUNTRY 

It  is  a  proven  fact  that  interest  rates  in  the  United  States  fluctuate 
on  a  much  wider  scale  than  in  European  countries.  Interest  rates  in 
Europe  in  normal  times  are  much  more  steadier  than  in  the  United 
States,  moving,  except  in  rare  cases,  by  only  one-sixteenth  of  one  per 
cent,  and  on  the  whole  within  narrower  limits.  In  the  United  States, 
however,  rates  fluctuate  from  one-fourth  of  one  per  cent,  to  one  per 
cent,  at  each  instance. 

A  broad  discount  market  would  connect  the  money  centers  and  the 
credit  centers  of  abroad  with  this  country,  and  by  the  movement  of 
money  from  one  center  to  the  other,  according  to  the  movement  of 
rates,  it  would  tend  to  lessen  fluctuation  and  would  eliminate  erratic 
movements  of  interest  and  exchange  rates  which  are  always  the  feature 
of  isolated  markets. 

THE   DISCOUNT   MARKET   AS   A   STABILIZER   OF   GOLD 
MOVEMENTS  BETWEEN  COUNTRIES 

Gold  movements  between  this  country  and  other  foreign  countries 
have  always  been  a  factor  of  considerable  importance  to  the  American 
merchant,  for  the  transfer  of  gold  has  greatly  influenced  the  rates  of 
exchange  on  foreign  points. 


212  Bank  and  Trade  Acceptances 

The  effect  of  exchang-e  rates  between  two  countries,  the  currency  of 
one  of  which  is  of  lesser  value  when  measured  in  the  terms  of  the 
currency  of  the  other,  is  to  cause  banks  to  increase  their  holdings  of 
the  bills  of  the  country  the  rates  of  which  are  lower.  As  an  illustra- 
tion, upon  the  decline  in  value  of  the  dollar,  foreign  banks  would  in- 
crease their  holdings  of  American  bills  on  account  of  the  cheap  dollar 
exchange  rate,  while  American  banks  would  sell  their  holdings  of 
foreign  bills  on  account  of  the  high  exchange  rates  on  foreign  coun- 
tries.   This  would  tend  to  ward  off  gold  movements  for  a  time. 

The  leading  banks  of  Europe  have  followed  this  process  of  accum- 
ulating a  line  of  foreign  bills  at  low  rates  and  disposing  of  them  when 
conditions  are  reversed.  It  has  been  carried  on  successfully  with  ad- 
vantageous profits  accruing  to  the  foreign  banks.  Not  many  banks 
engage  in  the  business  of  exporting  or  importing  gold,  this  being  con- 
fined principally  to  a  small  number  of  private  banks  or  firms  doing  a 
banking  business.  The  exportation  or  importation  of  gold  is  carried 
on  by  these  banks  for  the  purpose  of  yielding  a  profit,  however  small. 
A  discount  market  would  tend  to  eliminate  these  wasteful  and  tempo- 
rary shifts  of  gold,  unnecessary  in  the  majority  of  cases,  as  settlement 
by  commercial  paper  would  be  more  resorted  to. 

WHAT  IS  NECESSARY  TO  THE  MAINTENANCE  OF  A  DIS- 
COUNT MARKET 

Before  the  passage  of  the  Federal  Reserve  Act,  there  was  no  such 
thing  that  we  could  very  well  call  a  discount  market  existing  in  this 
country.  The  European  countries  which  had  developed  extensive  and 
effective  banking  systems  of  the  highest  order,  all  possessed  wide 
markets  affording  facilities  for  the  discount  of  credit  instrument.  It 
was  observed  by  these  European  countries  that  a  standardized  instru- 
ment of  credit  would  be  necessary,  and  it  is  for  this  reason  that  there 
was  developed  a  so-called  two  name  and  three  name  paper  as  the  best 
and  safest  way  in  which  credit  might  be  extended  and  circulated. 

The  Federal  Reserve  Board  realized  the  handicap  of  unstandardized 
paper  to  the  creation  of  a  discount  market,  and  readily  chose  the 
acceptance  as  a  high  form  of  credit  instrument  upon  which  the  exist- 
ence of  such  market  could  be  based ;  and  by  making  a  distinction  as  to 
trade  and  bank  acceptances  with  their  attendant  advantag-es,  has  sub- 
stantially eliminated  to  a  large  degree  the  responsibilities  and  dangers 


Commercial  Banking  and  Credits  213 

involved  in  the  open  book  account  method  and  that  of  written  instru- 
ment of  various  sorts  as  evidences  of  debt. 

A  prime  banker's  acceptance  is  a  credit  instrument  of  the  highest 
sort  and  is  preferred  by  the  Reserve  banks  for  purchase  and  invest- 
ment. A  large  amount  of  their  reserves  is  invested  in  this  class  of 
paper. 

A  trade  acceptance,  moreover,  arising  out  of  transactions  involving 
the  sale  of  goods,  is  from  its  very  nature  a  more  certain  form  of  credit 
than  a  mere  promissory  note  or  a  draft,  which  may  have  been  drawn 
for  a  number  of  purposes.  The  Reserve  banks  have  given  their  full 
support  to  the  acceptance,  knowing  well  from  experience  both  in  this 
country  and  abroad,  that  this  method  of  transacting  and  financing 
business  is  by  far  superior  to  the  open  account  method  or  to  single 
name  paper  dealings.  It  is  due  to  these  two  instruments  of  credit, 
the  trade  acceptance  and  the  bank  acceptance,  that  the  foreign  discount 
markets  depend,  and  it  is  upon  these  two  instruments  of  credit  that 
the  American  discount  market  will  eventually  be  supported. 

ESSENTIAL  FEATURES  OF  A  BROAD  DISCOUNT  MARKET 

The  factors  necessary  to  the  maintenance  of  a  broad  discount  market 
may  be  analyzed  as  follows : 

1.  Those  creating  the  acceptances,  or  the  accepting  banks  in  the 
case  of  bankers  acceptances,  and  the  seller  and  buyer  of  goods  in  the 
case  of  trade  acceptances. 

2.  Those  purchasing  and  selling  acceptances,  generally  the  banks. 

3.  The  central  bank  of  rediscount ;  in  the  United  States,  the  Fed- 
eral Reserve  banks ;  in  England,  the  Bank  of  England ;  in  France,  the 
Bank  of  France,  etc. 

4.  Discount  corporations,  brokers  and  others  of  a  similar  nature, 
which  though  considered  as  middlemen,  are  highly  essential  to  the 
maintenance  of  a  broad  discount  market. 

In  England,  where  the  acceptance  is  most  highly  developed,  the 
discount  market  acts  according  to  supply  and  demand.  .Should  the 
supply  of  bills  thrown  out  in  the  market  be  greater  than  the  demand 
for  the  same  by  the  investing  classes,  the  tendency  would  be  to  in- 
crease the  rate  of  discount,  thus  putting  an  automatic  stop  to  the  use 
of  acceptances  and  commercial  paper,  and  thereby  checking  credit 
over-extension. 


214  Bank  and  Trade  Acceptances 

The  liabilities  arising  on  account  of  acceptances  by  the  accepting 
banks  abroad  average  generally  from  fifty  to  seventy-five  per  cent,  of 
their  capital  and  surplus.  The  acceptance  banks,  though  not  extend- 
ing money  but  their  credit,  are  limited  in  their  operations. 

In  this  country,  it  is  believed  that  with  the  development  of  the 
acceptance,  the  bankers  here  will  be  enabled  to  operate  in  the  same 
manner  as  the  accepting  banks  of  Europe.  The  liability  that  an  ac- 
cepting bank  assumes  is  very  much  the  same  as  that  arising  out  of  a 
"deposit,"  and  though  banks  do  not,  by  accepting,  obligate  themselves 
to  give  a  present  right  to  demand  money,  still  the  acceptance  implies 
a  future  payment,  and  it  is  well  to  consider  to  what  extent  the  banks 
could  use  or  extend  their  credit  if  they  should  operate  as  extensively 
as  the  acceptance  houses  and  banks  abroad.  To  this  may  be  said  that 
so  long  as  the  proportion  of  a  bank's  capital  and  surplus  to  its  total 
liabilities  is  of  a  fair  ratio,  it  could  safely  pledge  its  credit  to  advan- 
tage. But  the  requirements  of  its  customers  for  that  form  of  accom- 
modation must  also  be  considered,  and  thirdly,  the  credit  standing  of 
the  bank,  and  lastly,  the  attitude  of  the  market  for  acceptances  at  the 
time. 

The  second  class  having  a  direct  bearing  on  the  discount  market 
are  the  banks  and  other  purchasers  and  sellers  of  acceptances,  which 
constitute  the  active  discount  market.  It  is  by  the  sale  and  purchase 
of  drafts  that  the  discount  market  is  really  maintained,  and  this  is  in 
accordance  with  the  individual  cash  and  investment  position  of  the 
banks  and  investing  classes.  For  this  reason  a  discount  market  should 
afiford  wide  facilities  for  acquiring  ready  cash  in  exchange  for  paper  in 
the  form  of  investments  and  vice  versa. 

Banks  would  do  well  in  purchasing  acceptances  to  spread  their  ma- 
turities so  that  they  could  continually  have  such  acceptances  maturing 
in  quantity,  thus  affording  both  a  cash  and  an  investment  advantage. 
In  order  that  a  properly  balanced  and  liquid  condition  of  its  assets 
may  be  maintained,  a  bank  must  have  on  hand  at  all  times  a  certain 
amount  of  cash.  This  includes  the  legal  reserve  such  bank  carries  with 
the  Federal  Reserve  Bank  and  its  cash  in  vault,  which  constitute  the 
bank's  primary  reserve. 

Acceptances  as  a  Secondary  Reserve 

In  addition  to  its  cash,  a  bank's  resources  should  be  in  the  form  of 
some  liquid  readily  saleable  investments  as  a  secondary  reserve,  and 


Commercial  Banking  and  Credits  215 

it  is  here  that  the  acceptance  can  best  play  its  part.  Of  course,  the 
position  of  a  bank  as  regards  its  holdings  of  acceptances  depends  upon 
the  nature  of  its  business.  Some  institutions  are  engaged  more  along 
specific  lines,  as  distinguished  from  general  commercial  banking,  for 
instance,  making  loans  on  mortgages  of  real  estate,  carrying  invest- 
ments in  the  form  of  public  credit,  in  which  may  be  included  govern- 
ment and  municipal  bonds,  and  investing  in  building  securities.  But 
as  a  ready  means  of  obtaining  cash,  next  to  its  actual  available  means 
in  the  form  of  its  legal  reserves  and  cash  in  vault,  the  acceptance,  being 
self  liquidating  at  short  intervals,  and  of  high  credit  standing,  is  un- 
doubtedly the  best  form  of  secondary  reserve  investment.  Invest- 
ments in  acceptances  and  similar  high  grade  commercial  paper  are 
advisable  in  the  case  of  banks  having  large  volumes  of  deposit  liabil- 
ities and  where  a  condition  of  uncertainty  of  drawings  on  the  part  of 
their  depositors  exists. 

The  acceptance  may  properly  be  considered  as  the  next  best  reserve 
to  actual  cash,  superseding  the  banks'  investments  in  loans  and  dis- 
counts, and  further  down  the  line,  in  point  of  liquidity,  in  securities, 
and  finally  in  fixed  investments  in  buildings,  etc. 

The  advantages  of  the  bank  acceptance  as  a  form  of  liquid  security 
have  been  recognized  by  a  large  number  of  States,  which  have  passed 
laws  permitting  savings  banks  organized  under  their  laws  to  invest 
in  such  bankers'  acceptances.  The  fact  that  these  savings  institutions 
are  investors  has  created  a  continuous  demand  for  such  paper,  thereby 
furthering  the  growth  of  the  acceptance.  The  acceptance  as  a  form 
of  investment  for  savings  banks  is  most  advantageous,  in  that  stocks 
or  bonds  in  either  railroads,  industrial,  mercantile  or  commercial  enter- 
prises, do  not  always  maintain  their  book  prices.  Savings  banks  are 
therefore  compelled  to  dispose  of  their  holdings  with  great  losses.  A 
proportion  of  their  resources  invested  in  acceptances  will  enable  them 
to  meet  initial  runs  with  confidence  and  ease,  and  with  no  fear  of 
depreciation  in  value. 

The  third  component  of  the  discount  market  is  the  central  redis- 
counting  bank,  which  in  this  country  is  the  Federal  Reserve  Bank. 
It  cannot  be  expected  nor  assumed  that  a  discount  market  would  al- 
ways produce  an  equal  number  of  buyers  and  sellers.  In  cases  where 
the  situation  becomes  one  that  is  not  equalized  by  purchases  between 
banks,  the  central  rediscounting  bank  should  operate  as  the  stabilizer 
by  the  purchase  or  sale  of  sufficient  quantities  of  paper  to  keep  con- 


2i6  Bank  and  Trade  Acceptances 

ditions  normal.  Frequently,  the  sales  on  the  part  of  banks  and  dealers 
in  acceptances  more  than  exceed  the  purchases,  and  at  such  times  the 
Federal  Reserve  Bank  should  purchase  under  such  regulations  as  it 
deems  wise,  either  direct  in  the  open  rmarket,  or  from  member  banks 
a  certain  amount  of  bills,  and  vice  versa. 

The  fourth  factor  in  the  maintenance  of  a  discount  market  is  the 
discount  corporation  and  broker.  These  are  middlemen.  They  act 
on  behalf  of  the  buyer  and  the  seller  at  one  time.  The  broker  and  dis- 
count corporation  are  always  in  touch  with  the  market  and  know  at 
all  times  the  requirements  of  one  bank  as  well  as  the  objects  of  an- 
other to  either  buy  or  sell. 

The  brokers  not  only  operate  as  middlemen  but  at  times  they  also 
purchase  for  their  own  account  large  quantities  of  commercial  accep- 
tances, which  they  let  out  at  intervals  to  the  investing  classes,  banks, 
and  others,  thus  constituting  a  floating  supply  without  which  a  free 
open  market  would  be  impossible.  On  the  whole,  the  broker  and  the 
discount  corporation  give  to  the  discount  market  its  effectiveness  and 
importance,  and  may  be  considered  as  the  white  corpuscles  of  the 
acceptance  market. 

THE  AMERICAN  DISCOUNT  MARKET  AND  ITS  DEVELOP- 
MENT 

The  acceptance  business  in  the  United  States  had  its  actual  begin- 
ning shortly  after  the  outbreak  of  the  European  War.  Owing  to 
changed  conditions  which  the  great  war  brought  with  it,  a  few  large 
banks  in  this  country  immediately  took  advantage  of  existing  oppor- 
tunities and  began  issuing  dollar  letters  of  credit  payable  in  the 
United  States.  However,  no  market  for  acceptances  existed  at  that 
time,  which  greatly  hindered  the  development  of  an  American  accep- 
tance market.  The  very  companies  which  issued  dollar  letters  of  credit 
had  to  purchase  them  themselves  at  the  start,  but  gradually,  with  a 
knowledge  of  their  advantages,  other  banks  took  a  hand  in  this  bidding 
and  purchasing,  which  action  on  their  part  resulted  in  lower  discount 
rates.  Increasing  bids  tended  to  lower  still  further  such  rates  until 
the  ruling  level  was  from  three  to  three  and  one-half  per  cent.  Later 
bankers  and  brokers  began  to  take  a  more  active  part  in  their  purchase, 
freely  bidding  for  the  acceptance,  and  it  was  then  that  a  discount 
market  had  arisen.    When  the  market  indicated  that  it  could  absorb 


Commercial  Banking  and  Credits  217 

more  of  these  acceptances,  discount  rates  fell  still  further,  as  low  as 
two  per  cent.  It  was  then  that  the  acceptance  had  the  push  of  the 
business  and  banking  element  of  the  country,  as  well  as  the  support  of 
the  associations  in  every  circle  of  trade,  industry  and  occupation 
throughout  the  United  States.  Banks  and  business  men,  thereafter, 
began  to  take  up  this  new  method  of  financing.  With  the  great  favor 
shown  to  this  class  of  paper  by  the  leading  bankers  and  business  inter- 
ests of  the  country,  the  Federal  Reserve  Board  finally  put  its  stamp  of 
fitness  on  their  use,  thereby  firmly  establishing  the  American  Dis- 
count Market. 

THE  DISCOUNT  MARKET  AS  IT  EXISTS  TO-DAY 

Though  still  in  its  infancy,  but  making  great  progress,  the  accep- 
tance has  yet  to  overcome  great  difficulties.  An  important  factor  to 
be  considered  restricting  its  use  is  found  in  legislative  restrictions 
which  retard  many  of  our  banks  from  fully  utilizing  their  acceptance 
powers.  The  very  nature  of  the  acceptance,  that  it  must  not  be  used 
to  finance  permanent  investments  not  pure  speculations,  nor  for  the 
purpose  of  furnishing  working  capital,  or  so-called  accommodations, 
enables  a  proper  distribution  of  credit  risks.  By  all  means,  the  accep- 
tance should  be  restricted  from  being  used  for  speculative  enterprises. 

It  is  the  unfamiliarity  of  the  majority  of  banks,  particularly  the 
small  ones  scattered  throughout  the  country,  with  the  trade  and  bank 
acceptance  and  their  practical  usefulness,  that  is  the  real  cause  re- 
tarding their  development.  American  methods  of  doing  business 
under  the  open  account  and  single  name  paper  method,  stand  ten  to 
one  against  the  acceptance  to-day,  and  must  be  overcome  before  the 
latter  may  be  firmly  established  in  this  country.  For  this  reason,  it  is 
necessary  that  acceptances,  when  used,  should  be  used  for  the  specific 
purposes  out  of  which  they  are  created,  that  is,  in  liquidation  of  cur- 
rent and  existing  transactions  only. 

Moreover,  during  the  war,  the  development  and  use  of  the  accep- 
tance was  confronted  with  great  difficulties,  arising  out  of  govern- 
mental finance.  Even  to-day,  the  trade  and  bank  acceptance  is  gov- 
erned by  the  prices  and  interest  yields  of  governmental  securities. 
Whether  they  be  in  the  form  of  liberty  bonds  or  in  treasury  certifi- 
cates, the  government  securities  yield  a  standard  of  interest  below 
which  acceptances  cannot  go  far  without  becoming  unattractive  for 


2l8 


Bank  and  Trade  Acceptances 


investing  banks.  It  is  hoped  that  in  the  near  future,  when  the  govern- 
ment regains  its  credit  standing  which  it  enjoyed  before  the  war,  and, 
when  the  value  of  government  securities  will  undoubtedly  be  en- 
hanced, the  acceptance  will  be  looked  to  more  and  more  by  all  invest- 
ing classes  as  ideal  for  the  employment  of  funds. 


CHAPTER  XXIII 

Acceptances  as  Investments 

Acceptance  a  new  form  of  short  term  investment. — Heretofore  we 
have  confined  our  expressions  on  the  trade  and  bank  acceptance  in 
connection  with  their  usefulness,  importance  and  application  to  com- 
mercial banking,  but  we  have  not  touched  upon  the  acceptance  as  a 
means  of  investment.  With  the  development  of  the  acceptance  method 
in  the  United  States  and  with  the  rapid  development  of  the  Federal 
Reserve  System,  there  has  been  made  available  to  the  investors  of 
this  country  a  new  form  of  short  term  investment. 

Used  extensively  in  Europe. — The  acceptance  is  not  a  new  instru- 
ment of  credit,  having  been  in  use  in  the  leading  European  nations 
for  a  great  number  of  years.  So  extensive  is  their  use  in  those  coun- 
tries that  they  circulate  there  as  freely  as  do  checks  in  the  United 
States,  and  are  used  in  the  majority  of  commercial  transactions,  re- 
quiring credit.  However  well  developed  a  system  of  banking  based 
upon  the  acceptance,  these  European  nations  have  built  up,  this  class 
of  commercial  paper  is,  however,  a  comparatively  new  development 
in  the  United  States.  Prior  to  the  passage  of  the  Federal  Reserve 
Act,  banks  in  this  country  were  not  allowed  to  accept  drafts  drawn 
on  them  and  payable  at  some  future  date.  This  was  due  mainly  to 
the  lack  of  knowledge  of  the  acceptance  and  its  advantages  both  as 
an  investment  and  as  an  instrument  of  credit. 

Importance  of  the  Federal  Reserve  Act  to  acceptances. — The  pro- 
visions and  amendments  of  the  Federal  Reserve  Act  are  of  such 
importance  to  the  development  of  commercial  banking  and  accep- 
tances that  it  is  thought  best  to  outline  such  as  are  of  direct  appli- 
cation to  the  acceptance  market.  In  this  country,  recognition  of  ac- 
ceptances as  a  sound  and  highly  desirable  investment  is  rapidly  fol- 
lowing the  broadening  field  of  their  commercial  utility. 

Privileges  afforded  banks  as  to  accepting  and  investing. — Under  the 
Federal  Reserve  Act,  banks  are  given  the  privilege  of  accepting  up 

219 


220  Bank  and  Trade  Acceptances 

to  fifty  per  cent,  of  their  capital  and  surplus,  and  in  special  cases, 
where  applications  are  approved  by  the  Board,  such  banks  may 
receive  the  right  to  accept  up  to  one  hundred  per  cent,  of  their  cap- 
ital and  surplus.  The  Federal  Reserve  System  includes  all  national 
banks,  many  State  banks,  and  trust  companies,  having  acceptance 
proviliges,  both  as  to  acceptances  and  as  to  purchases.  The  pres- 
ent day  procedure  involved  in  investing  in  acceptances  outside  of 
direct  dealing  between  buyer  and  seller  is  along  the  following  lines: 

The  work  of  the  commercial  paper  brokers. — Above  all,  it  is  neces- 
sary that  intermediaries  be  established  which  should  bring  buyer  and 
seller  of  commercial  paper  together.  Thus,  out  of  necessity,  there 
have  arisen  numerous  commercial  paper  brokers  and  dealers  who  are 
in  close  touch  with  commercial  firms  having  paper  to  ofTer  on  the 
market.  They  are  always  in  touch  with  banks  and  financial  estab- 
lishments throughout  the  country  having  money  to  invest.  The  com- 
mercial paper  broker  or  dealer  will,  therefore,  take  acceptances  from 
off  the  hands  of  the  holders  and  dispose  and  distribute  them  accord- 
ing to  the  needs  of  the  investors.  These  investors  may  be  either 
National  banks  or  State  banks,  trust  companies,  discount  corpora- 
tions, private  investors,  corporations,  firms,  and  even  in  some  States, 
savings  banks  and  trust  estates. 

Other  methods  of  dealing  in  commercial  paper. — Though  the  com- 
mercial paper  broker  is  considered  of  great  importance  in  the  proper 
distribution  of  acceptances,  where  his  services  in  bringing  buyer  and 
seller  together  help  supply  to  meet  demand,  this  is  not  the  only  way 
in  which  commercial  paper  dealings  are  carried  on.  Banks  sometimes 
deal  directly  with  other  banks,  and  sometimes  deal  with  firms  having 
commercial  paper,  direct,  without  the  intermediaries.  However,  the 
commercial  paper  broker,  because  he  is  familiar  with  market  provi- 
sions of  commercial  paper  and  knows  the  sources  of  demand  most 
favorable  to  the  seller  as  well  as  to  the  buyer,  should  be  utilized 
wherever  and  whenever  possible. 

Acceptance  a  favorable  item  of  investment. — The  acceptance  is  fast 
becoming  a  favorable  item  of  investment  with  the  banks  and  investing 
classes.  Not  only  is  there  an  advantage  to  the  banks  and  general  finan- 
cial establishments  in  investments  in  acceptances,  but  also  to  the  indi- 
vidual, firm  and  to  the  corporation  which  have  at  various  times  during 


Commercial  Banking  and  Credits  221 

the  course  of  their  business  operations  surplus  funds  which  could  be 
used  for  investments. 

Example  of  use. — As  an  illustration,  assume  that  a  corporation  has 
declared  a  dividend  on  its  capital  stock  to  be  payable  two  months 
hence.  Let  us  further  assume  that  it  desires  to  meet  this  future  con- 
tingency and  that  it  has  ample  funds  on  hand  for  the  purpose.  In 
order  to  avoid  unprofitableness  in  allowing  such  funds  to  remain  on 
deposit  till  it  is  necessary  that  they  be  disbursed,  an  investment  in 
high  grade  bank  acceptances  having  a  maturity  approximating  the 
due  date  of  the  dividends,  would  give  to  the  corporation  a  means  of 
employing  its  funds  until  required.  The  case  of  the  business  estab- 
lishment or  individual  is  much  the  same,  they  being  enabled  also  to 
loan  out  their  surplus  funds  and  to  purchase  prime  commercial  paper 
of  the  "acceptance"  class,  at  better  yields  than  otherwise  for  short 
term  investments. 

Discount  corporations. — Coincident  with  the  development  of  the 
Federal  Reserve  System  permitting  member  banks  to  accept  up  to  a 
certain  percentage  of  their  capital  and  surplus,  there  has  also  been 
developed  in  this  country,  as  a  result  of  the  demands  upon  the  busi- 
ness and  financial  world,  a  number  of  so-called  discount  corporations, 
which  make  a  specialty  of  "accepting"  paper  and  which  are  regulated 
in  their  operations  in  much  the  same  way  as  are  member  banks.  These 
acceptances  arising  out  of  commercial  transactions  are  very  high-class 
investments  for  member  banks,  individuals  and.  in  fact,  are  sought 
by  the  Federal  Reserve  Banks  throughout  the  country,  as  investments. 

The  Federal  Reserve  Banks  and  their  investments  in  acceptances. — 
The  growth  of  the  investment  business  in  acceptances  by  the  Fed- 
eral Reserve  Banks  has  risen  to  many  hundreds  of  millions  of  dollars 
during  the  past  year,  which  bears  evidence  to  the  fact  that  they  are  a 
very  desirable  method  of  employing  surplus  funds. 

Again,  the  rates  established  for  the  discount  of  bankers'  acceptances, 
generally  lower  than  those  of  call  loans,  still  bear  with  them  a  greater 
advantage  in  the  better  security  offered  and  the  better  means  of 
liquidity,  which  should  make  them  far  more  preferable  as  investments. 

Other  factors  in  the  acceptance  investment  business. — The  progress 
in  the  development  of  the  acceptance  business  as  an  item  of  invest- 
ment has  brought  into  existence  numerous  commercial  paper  dealers 


222  Bank  and  Trade  Acceptances 

and  brokers,  who  make  a  specialty  of  dealing  in  bank  and  trade  accep- 
tances. These  dealers,  many  of  whom  are  private  bankers  and  well 
known  stockbrokers,  generally  issue  periodical  bulletins  called  "accep- 
tance offerings."  The  houses  having  commercial  paper  to  offer  natu- 
rally acquire  them  through  purchase  from  commercial  firms  and  gen- 
eral holders  of  bank  and  trade  acceptances.  An  investor,  firm,  cor- 
poration, or  bank,  having  surplus  funds,  chooses  from  the  offering  list 
the  same  as  from  a  list  of  bonds  and  other  securities,  and  selects  ac- 
cording to  the  faith  based  upon  the  acceptors  of  the  draft. 

The  Acceptance  as  an  Investment  Analyzed 

Availibility  of  trade  and  bank  acceptances. — ^Trade  acceptances  and 
bank  acceptances  at  the  present  time  are  available  for  investment  pur- 
poses in  nearly  any  amount  and  for  any  desired  maturity.  Of  the 
two,  bankers'  acceptances  are  the  usual  form  available  for  investment. 
The  bank  acceptances  comprise  two  classes,  eligible  and  ineligible. 
Both  forms  of  bankers'  acceptances  are  dependent  upon  the  rating 
and  credit  standing  of  the  accepting  banking  institution,  which  places 
the  bills  accepted  among  the  highest  grade  of  securities.  The  chief 
responsibility  rests  with  the  accepting  banks,  which  because  of  their 
greater  credit  ability  and  more  conservative  operation,  obviates  the 
necessity  for  close  scrutiny  of  the  drawer  of  the  bill  or  its  indorsers. 

The  Acceptance  as  an  Equalizer  of  the  Bank's  Cash  and  Invest- 
ment Position 

Liquidity  of  investments. — As  a  secondary  reserve  for  banks,  there 
is  no  other  investment  so  liquid  as  the  acceptance.  Such  a  bill  is  a 
short  term  investment  offering  assurance  of  payment  at  maturity. 

The  open  market  feature  of  such  an  acceptance  and  the  purchasing 
power  of  the  Federal  Reserve  Banks  contribute  to  the  position  of  the 
acceptance  as  a  premiere  investment  for  banks  wishing  to  establish  a 
secondary  reserve. 

As  a  liquid  investment,  the  acceptance  is  the  highest  form  of  com- 
mercial paper.  Banking  experience  for  many  years  has  demonstrated 
that  purely  commercial  loans  are  the  safest  of  all  temporary  invest- 
ments. 


Commercial  Banking  and  Credits  223 

Acceptances  as  Short  Time  Investments 

The  acceptance  to-day  is  available  in  almost  any  amount  and  for 
almost  any  maturity.  The  various  banks  and  discount  corporations 
making  a  specialty  of  acceptances  have  at  all  times  a  large  supply 
of  this  class  of  commercial  paper  available  for  investment  purposes. 

One  great  advantage  in  the  acceptance  as  an  investment  lies  in  the 
fact  that  its  security  is  of  a  very  high  character  and  it  is  self-liquidat- 
ing. As  a  short  term  investment,  it  is  much  more  desirable  and  con- 
venient than  other  means  of  investments.  The  Federal  Reserve  Banks 
employ  a  considerable  amount  of  their  funds  in  investments  in  accep- 
tances, and  distribute  them  so  that  their  maturities  are  continu- 
ous. At  the  present  time  more  favorable  legislation  is  being 
adopted  in  many  States  of  the  Union  favoring  the  acceptance  as  a 
means  of  investment  for  savings  banks  and  trust  companies.  More- 
over, a  large  number  of  corporations  and  business  houses  throughout 
the  country,  particularly  those  w^hich  favor  the  acceptance  method, 
purchase  quantities  of  this  class  of  commercial  paper  according  to 
their  surplus  funds. 

Trade  Acceptances 

The  second  class  of  acceptances,  namely  trade  acceptances,  are 
largely  bought  by  Federal  Reserve  Banks  and  are  dealt  in  extensively 
by  the  banks  and  discount  houses  of  the  country. 

The  same  discussions  heretofore  stated  in  connection  with  bank 
acceptances  v^ould  apply  equally  to  trade  acceptances.  They,  too, 
will  undoubtedly  prove  to  be  a  desirable  form  of  investment,  their 
qualities  as  standardized  commercial  paper  of  a  high  class  being  gen- 
erally recognized  by  the  banks  and  investing  houses. 


CHAPTER  XXIV 

CONCLUSION 

The  Need  for  Wholehearted  Co-operation 

In  the  course  of  the  development  of  the  acceptance  in  this  country,  as 
in  the  development  of  other  worthy  purposes,  difficult  tasks  invariably 
arise,  not  because  of  the  question  of  merits  involved,  but  for  the  reason 
that  a  complete  understanding  of  the  method  to  be  introduced  and  ex- 
tended, is  lacking.  The  acceptance  idea,  coming  from  a  national  demand 
which  arose  from  war  conditions,  for  the  establishization  oi  a  sounder 
credit  system,  has  today  the  approval  of  the  leading  commercial,  financial, 
and  governmental  bodies. 

It  is  pleasing  also  to  find  that  on  the  whole  only  a  comparatively  slight 
opposition  has  been  encountered  in  the  development  of  the  trade  ac- 
ceptance method. 

TIME  REQUIRED 

Different  minds  develop  different  points  of  view.  The  acceptance 
method,  where  it  is  desired  to  be  introduced,  must  clearly  have  its  ad- 
vantages shown  and  its  merits  made  to  be  appreciated.  The  progress  of 
the  acceptance  has  been  very  rapid.  From  almost  zero  at  the  start,  the 
acceptance  today  has  risen  to  more  than  national  prominence  and  im- 
portance. 

However,  it  is  not  in  the  least  strange  that  the  entire  business  of  the 
country  has  not  yet  adopted  the  trade  acceptance  method.  Experience  has 
shown,  as  well  as  the  economic  histories  of  nations,  that  radical  changes 
in  the  business  methods  of  a  country,  even  though  of  the  very  best,  come 
slowly  and  require  serious  and  continued  effort. 

THE  BANKER  REVIEWED 

The  banker  has  all  to  gain  and  nothing  to  lose  by  the  trade  acceptance 
method.  The  acceptance  has  proved  itself  to  be  the  best  commercial 
paper  in  the  field.  It  is  the  safest  of  all  other  forms  of  commercial  paper. 
It  may  be  utilized  for  the  investment  of  idle  funds.    It  is  in  itself  an  ideal 

224 


Commercial  Banking  and  Credits  225 

liquid  asset.  It  creates  a  keener  sense  of  business  obligation,  a  prompter 
payment  of  debts,  better  business  in  general,  and  as  a  consequence,  better 
banking  conditions. 

J 

THE  SELLER 

To  the  seller  of  merchandise,  we  would  say  that  the  trade  acceptance  is 
yet  the  best  plan  of  assistance  that  has  ever  been  devised  for  him  and  a 
protector  of  his  interests  to  the  fullest  extent.  It  carries  with  it  a 
definite  promise  to  pay,  an  acknowledgment  of  the  correctness  of  deliveries 
and  of  the  obligation  itself,  a  shorter  term  of  credit,  liquidity  of  assets, 
better  facilities  for  collection,  closer  touch  with  the  buyer  and  the  seller's 
bank,  and  practical  relief  from  expenses  and  burdensome  practices  which 
have  grown  up  under  the  open  account  method. 

THE  BUYER 

For  the  buyer,  the  trade  acceptance  is  of  a  particular  and  distinct 
benefit.  It  puts  him  in  the  classification  of  a  preferred  customer,  one  who 
serves  notice  on  the  business  world  of  his  disposition  and  ability  to  meet 
his  obligations  promptly  at  maturity.  It  gives  to  him  greater  independ- 
ence of  action,  provides  an  effective  check  against  over-buying  and  over- 
borrowing,  eliminates  the  evils  of  laxity  in  credit  extension,  in  specula- 
tion, and  tends  to  establish  his  standing  with  the  banks  and  the  business 
community.  The  buyer  should  not  be  fearful  of  any  inroads  upon  his 
privileges.  The  trade  acceptance  does  not  take  away  from  him  his  cash 
discount  nor  his  privilege  to  use  single  name  paper,  for  ihey  both  operate 
smoothly  and  without  conflict  in  the  same  field. 

BUSINESS  MEN  MUST  CO-OPERATE 

There  are  still  today  great  numbers  of  American  businessmen  who  are 
uninformed  concerning  the  details  of  the  trade  acceptance  method,  and 
therefore,  unconvinced  as  to  its  merit.  Some  at  least  have  given  the  ac- 
ceptance a  so-called  introduction.  In  the  majority  of  cases  where  this  was 
done,  the  acceptance  has  come  to  stay.  Nevertheless,  others  of  an  ultra- 
conservative  type,  while  conceding  its  merit,  arc  not  disposed  to  disturb 
existing  business  conditions,  which  in  the  past  have  proven  themselves 
satisfactory  for  their  purpose.  There  is  still  another  class  of  American 
businessmen,  whose  attitude  may  be  described  as  unduly  cautious.     They 


226  Bank  and  Trade  Acceptances 

want  all  others  to  settle  down  in  the  use  of  acceptances  before  they  them- 
selves will  adopt  the  plan. 

THE  GOVERNMENT 

Nevertheless,  the  prospect  is  altogether  encouraging,  for  in  nearly  every 
line  of  business  is  the  acceptance  used  today.  The  Government  has  ren- 
dered the  greatest  assistance,  through  the  mechanism  of  the  Federal  Re- 
serve System,  to  the  progress  of  the  acceptance  method.  This  alone  has 
influenced  many  to  adopt  the  plan.  Through  the  establishment  of  wider 
banking  facilities,  the  Government  has  given  every  advantage  to  the 
standardization  of  commercial  paper  and  has  thereby  rendered  an  in- 
valuable service  and  aid  to  the  country. 

THE  BANKER 

But  other  sources  which  are  fully  capable  of  rendering  an  equally 
valuable  assistance  to  American  business  have  been  the  banks,  and  here 
the  question  has  been,  "What  are  they  doing?"  Evidently,  the  only  possi- 
ble answer  for  this  question  is  that  if  they  possess  sufficient  business  in- 
telligence to  be  able  to  appreciate  the  merit  of  a  superior  article  when  it  is 
presented  to  them  for  sale  or  discount,  or  of  the  general  adoption  of 
sounder  credit  methods,  they,  too,  must  have  a  greater  interest  in  the  plan. 
They  must  be  progressive,  alert  to  encourage  every  movement  tending 
to  bring  about  the  soundest  and  most  scientific  credit  system.  If  the 
banker  has  been  accused  of  retarding  the  development  of  the  acceptance, 
this  situation,  however,  is  fast  becoming  remedied  and  a  greater  interest 
is  being  shown  daily  by  increasing  numbers  of  banks  throughout  the 
country  for  more  information  on  the  acceptance  and  its  principles.  Even 
those  banks  which  have  displayed  an  unfavorable  attitude  in  the  past 
towards  the  acceptance  method  are  today  fast  coming  to  realize  its  prac- 
tical utility.  Already,  there  has  been  established  the  basis  for  an  Ameri- 
can open  discount  market  and  the  users  of  the  acceptance  are  becoming 
more  numerous  every  day.  With  the  proper  publicity  to  this  better  form 
of  credit,  by  the  banker,  his  help  and  co-operation  towards  extending  its 
use,  with  the  encouragement  which  he  is  able  to  give  the  business  com- 
munity, the  progress  of  the  acceptance  will  be  most  rapid  indeed. 


PART  III 

COMMERCIAL  BANKING  PRACTICE  AND  ACCEPT- 
ANCES UNDER  THE  FEDERAL 
RESERVE  SYSTEM 

Giving  the  Rulings,  Regulations,  Opinions  of  Counsel,  General  Statu- 
tory Provisions,  and  Amendments  to  1920,  in  Connection  vi^ith 
Commercial  Banking  Practice  Under  the  Federal  Reserve  Sys- 
tem ;    an  Authoritative   and   Standard   Reference  Work 
Covering  the  Entire  Field  Relating  to  Acceptances 
in  Commercial  Banking  Practice  Under  the  Fed- 
eral Reserve  Act  and  Amendments  Thereto. 


COMMERCIAL  BANKING  AND  CREDITS 
BANK  AND  TRADE  ACCEPTANCES 


PART  III 

COMMERCIAL  BANKING  AND  CREDITS 

ACCEPTANCES 

General  Introduction 

Commerce  and  finance  owe  much  to  the  acceptance,  used  by  other 
commercial  and  financial  centres  for  hundreds  of  years  with  success, 
but  only  recently  permitted  by  our  banking  laws. 

Acceptances  are  daily  proving  more  and  more  of  advantage,  alike  to 
the  banker,  the  domestic  merchant,  the  manufacturer,  the  importer, 
the  exporter  and  the  investor.  It  has  served  to  remove  obstacles  that 
stood  in  the  way  of  a  free  cultivation  of  foreign  rharkets,  and  in  this 
connection  it  must  be  realized  that  a  broad  discount  market  is  essen- 
tial if  we  are  successfully  to  compete  for  a  share  of  the  world's 
business. 

Under  the  authority  granted  by  the  Federal  Reserve  Act  to  the 
Federal  Reserve  Board,  there  has  been  made  provision  for  the  devel- 
opment of  a  broad  discount  market.  Briefly,  acceptances  under  the 
Federal  Reserve  Act  and  in  commercial  banking  practice  may  be 
summarized  as  follows : 

Any  national  bank  may  have  oustanding  acceptances  aggregating 
fifty  per  cent,  of  its  capital  and  surplus.  By  applying  to  the  Federal 
Reserve  Board  a  bank  may  receive  permission  to  have  outstanding 
acceptances  up  to  one  hundred  per  cent,  of  its  capital  and  sur- 
plus, but  in  no  event  may  acceptances  in  domestic  transactions 
exceed  fifty  per  cent,  of  the  capital  and  surplus  of  the  bank.  No 
acceptance  may  have  a  maturity  later  than  six  months  after  the  date 
of  acceptance.  The  amount  any  member  bank  may  accept  for  any 
one  person,  firm,  or  corporation  must  not  exceed  ten  per  cent,  of  the 
bank's  capital  and  surplus,  but  such  limitation  does  not  apply,  how- 

229 


230  Bank  and  Trade  Acceptances 

ever,  where  the  bank  is  secured  by  some  actual  security  growing  out 
of  the  same  transaction  as  the  acceptance ;  the  security  must  remain 
with  the  bank  all  the  time  the  acceptance  is  outstanding. 

With  the  authority  of  the  Federal  Reserve  Board,  a  member  bank 
may  also  accept  up  to  fifty  per  cent,  of  its  capital  and  surplus,  drafts 
drawn  upon  it  for  the  purpose  of  furnishing  dollar  exchange.  When 
accepted  for  this  purpose,  drafts  must  mature  within  three  months. 

Several  States  of  the  Union  have  already  enacted  legislation  per- 
mitting the  banks  operating  under  their  laws  to  make  acceptances. 
Further  than  this,  it  has  been  made  legal  for  savings  banks  and  estate 
funds  to  invest  in  acceptances.  The  amount  and  restrictions,  how- 
ever, vary  with  the  different  States. 

The  four  classes  of  bills  which  national  banks  may  accept  are : 

T.  Those  arising  out  of  a  transaction  involving  the  importation  or 
exportation  of  goods ; 

2.  Those  arising  out  of  a  transaction  involving  the  domestic  ship- 
ment of  goods ; 

3.  Those  which  are  secured  by  readily  marketable  goods  in  storage. 

4.  Those  drawn  for  the  purpose  of  furnishing  dollar  exchange. 

ACCEPTANCES  ARISING  OUT  OF  A  TRANSACTION  INVOLV- 
ING THE  IMPORTATION  OR  EXPORTATION  OF  GOODS 

Example  of  an  importation  acceptance ;  Procedure ; — Let  us  assume 
that  an  importer  is  desirous  of  purchasing  a  quantity  of  manila  hemp. 
He  advises  his  bank  regarding  the  particulars  of  the  transaction,  and 
his  credit  standing  being  satisfactory,  his  bank  issues  at  his  request  a 
so-called  commercial  credit.  By  means  of  this  credit,  the  Philippine 
exporter  is  authorized  to  draw  on  the  bank  up  to  a  stipulated  amount, 
which  would  be  for  the  value  of  the  hemp  purchased  by  the  importer. 
Furthermore,  such  provisions  which  require  that  drafts  be  drawn  and 
negotiated  on  or  before  a  certain  date,  and  giving  the  usance,  that  is, 
that  the  drafts  must  mature  thirty,  sixty  or  ninety  days,  or  whatever 
the  period  may  be  after  sight,  are  included  in  the  commercial  credit. 
Besides  stipulations  as  to  the  documents  and  certificates  of  insur- 
ance, bills  of  lading,  etc.,  to  the  effect  that  they  must  be  attached  to 
the  drafts,  also  appear  in  the  commercial  credit. 

There  are  two  means  through  which  such  credit  may  be  availed  of 


Commercial  Banking  and  Credits  231 

by  the  exporter  abroad ;  first,  the  mere  mailing  of  the  credit  to  the 
importer,  and  secondly,  the  cabling  of  the  information  through  a  bank 
located  in  the  vicinity  of  the  exporter. 

Upon  receipt  of  this  advice,  the  exporter  prepares  his  shipment,  and 
when  so  shipped,  that  is,  boarded  upon  the  steamer,  he  is  in  possession 
of  the  ocean  bill  of  lading  and  other  necessary  documents,  and  is  then 
enabled  to  draw  a  draft  on  the  bank  in  this  country  issumg  the  credit 
for  the  value  of  the  hemp. 

Let  us  further  assume  that  the  draft  has  a  maturity  of  ninety  days, 
and  all  documents  required  by  the  commercial  credit  in  question  are 
attached  to  such  draft.  He  then  takes  the  draft  to  his  local  bank, 
which  purchases  the  draft  at  the  current  rate  of  exchange  for  ninety 
days'  sight  dollar  bills. 

In  the  above  case,  the  shipping  and  other  documents  are  all  made 
out  or  endorsed  so  as  to  give  the  bank  purchasing  the  draft  title  to 
the  goods.  The  local  bank  in  Manila  forwards  the  draft  and  docu- 
ments to  its  agency  or  correspondent  in  this  country.  The  draft  is 
then  presented  by  the  correspondent  of  the  Philippine  bank  to  the 
bank  in  this  country  issuing  the  credit,  and  if,  after  an  examination  of 
the  draft  and  documents  attached,  everything  is  found  to  be  in  order, 
the  bank  accepts  the  draft,  returning  it  to  the  party  presenting  it,  who, 
in  this  case,  is  the  correspondent  of  the  Philippine  bank.  The  accept- 
ing bank  likewise  retains  all  other  documents  necessary  to  be  sur- 
rendered to  the  importer.  The  importer,  upon  giving  the  accepting 
bank  a  trust  receipt  in  exchange  for  the  documents,  is  then  enabled 
to  get  his  manila  hemp.  The  importer  thus  has  ninety  days  in  which 
to  secure  the  manila  hemp,  and  dispose  of  it  or  manufacture  and  sell 
it  before  he  is  required  to  place  his  bank  in  funds  to  meet  the  maturing 
draft.  The  representative  of  the  Philippine  bank  sells  the  acceptance 
in  the  open  market  at  the  prevailing  rate  for  ninety  day  bills. 

For  making  this  transaction  possible,  the  importer's  bank  charges 
him  a  small  commission  for  accepting  the  draft.  Only  credits  issued 
by  the  well-known  banks,  of  course,  will  be  acceptable  to  the  exporter 
as  he  requires  a  bill  which  will  command  the  best  rate.  This  accept- 
ance business  is  therefore  usually  handled  by  banks  in  the  larger  cen- 
ters. The  lesser  known  institution  usually  has  credits  required  by  its 
importers  issued  by  one  of  its  larger  correspondents,  under  the 
guaranty  of  the  smaller  bank. 


232  Bank  and  Trade  Acceptances 

Example  of  an  Exportation  Acceptance;  Procedure; — An  exporter 
in  this  country,  let  us  assume,  has  been  asked  to  ship  a  quantity  of 
machinery  to  a  firm  in  Great  Britain.  The  exporter  is  not  willing  to 
ship  the  machinery  on  condition  that  he  draw  a  draft  direct  on  his 
customer,  nor  is  he  willing  to  sell  such  customer  on  open  account. 

In  such  case,  a  banker's  acceptance  credit  may  be  availed  of.  The 
foreign  importer  goes  to  his  bank  in  Great  Britain  and  has  a  credit 
arranged  with  its  correspondent  in  this  country  to  cover  the  value  of 
the  machinery.  The  British  bank,  let  us  assume,  considers  the  credit 
of  the  importer  as  favorable  and  accordingly  requests  its  correspondent 
in  this  country  to  issue  the  credit.  The  British  bank,  moreover,  guar- 
antees that  the  bank  issuing  the  credit  in  this  country  will  be  placed 
in  funds  before  such  drafts  as  may  be  drawn  upon  it  under  the  credit 
issued,  mature.  The  exporter  is  then  advised  by  the  bank  in  the 
United  States  that,  as  requested  by  the  purchaser,  it  will  accept  his 
drafts  drawn  upon  it  up  to  a  certain  amount,  when  the  drafts  are 
accompanied  by  documents  as  specified  in  the  letter  of  credit. 

The  procedure  in  documents  in  an  exportation  acceptance  is,  on 
the  whole,  similar  to  that  involved  in  importations,  and  the  documents 
must,  of  course,  represent  the  machinery  which  has  been  shipped. 

As  soon  as  the  exporter  secures  his  necessary  shipping  and  other 
documents,  he  draws  a  draft  on  the  bank  here  issuing  the  credit,  hav- 
ing a  maturity  in  accordance  with  its  terms,  for  the  value  of  the 
machinery.  The  exporter  then  presents  the  draft  and  documents  to 
the  bank  issuing  the  credit,  and  everything  being  found  in  order,  the 
bank  accepts  the  draft  and  returns  it  to  the  exporter,  who  sells  it  in 
the  market  and  thus  receives  payment  for  his  machinery.  Such  docu- 
ments are  then  forwarded  to  the  British  bank,  to  be  released  by  it  to 
the  purchaser,  either  upon  trust  receipt  or  otherwise.  The  British 
bank,  through  remittances,  or  by  charge  against  its  balance  in  this 
country,  places  its  correspondent  in  funds  to  meet  the  draft  at 
maturity. 

ACCEPTANCES  ARISING  OUT  OF  TRANSACTIONS  INVOLV- 
ING THE  DOMESTIC  SHIPMENT  OF  GOODS 

Procedure  in  the  case  of  domestic  transactions  is  very  much  similar 
to  those  involving  the  exportation  or  importation  of  goods. 

As  an  example,  let  us  take  the  case  of  a  manufacturer  who  desires 


Commercial  Banking  and  Credits  233 

to  finance  his  purchases  of  raw  material  by  means  of  bankers'  accept- 
ances. He  accordingly  requests  his  bank  to  issue  a  credit  in  favor  of 
the  sellers  of  the  goods.  Such  credit  is  for  a  stipulated  amount  not 
exceeding  to  any  large  extent  the  value  of  the  goods.  Such  drafts 
drawrn  to  finance  purchases  of  raw  materials  usually  have  a  usance 
which  give  the  purchaser  time  to  manufacture  this  raw  material  and 
sell  the  manufactured  product.  They  are  usually  drawn  for  a  period 
of  ninety  days,  as  bills  with  a  longer  maturity  may  be  said  not  to  have 
a  ready  market.  The  seller  will  then  ship  his  goods  and  draw  a  draft 
for  their  value  on  the  bank  issuing  the  credit.  The  draft,  together  with 
shipping  documents,  is  then  forwarded  to  the  bank,  and,  as  in  the 
case  of  exports  and  imports,  such  documents  must  be  so  issued  or 
indorsed  as  to  give  the  bank  title  to  the  goods.  The  bank  accepts  the 
draft  and  returns  it  to  the  shipper,  who  disposes  of  it  at  the  prevailing 
discount  rate.  The  documents  are  turned  over  to  the  manufacturer, 
probably  under  a  trust  receipt,  and  he  is  then  enabled  to  secure  his 
raw  material,  manufacture  and  sell  his  goods.  He  is  requested  to 
place  the  bank  in  funds  to  meet  the  draft  before  maturity. 

ACCEPTANCES    SECURED    BY    READILY    MARKETABLE 

GOODS   IN   WAREHOUSE 

As  a  further  example  of  this  class  of  acceptance,  let  us  take  the  case 
of  a  clothing  manufacturer  who  desires  to  carry  a  stock  of  silks  by 
means  of  the  banker's  acceptance.  He  places  the  merchandise  in  a 
warehouse,  draws  a  draft  on  his  bank  for  the  value  of  the  silk,  attach- 
ing the  warehouse  receipts  as  collateral.  The  draft,  after  acceptance, 
is  returned  to  him  to  be  sold,  the  warehouse  receipts  being  retained  by 
the  bank.  The  requirements  as  to  warehouses  in  connection  with 
bankers'  acceptances  will  be  better  explained  by  a  reference  to  the 
general  statutory  provisions,  regulations  and  rulings  of  the  Federal 
Reserve  Board  and  opinions  of  counsel  reviewed  in  the  following 
pages;  also  the  United  States  Warehouse  Laws  in  Part  V  of  this 
work. 

It  may  be  said,  in  summary,  that  the  silk  must  be  stored  in  a  ware- 
house which  is  independent  of  the  manufacturer ;  that  is,  the  manu- 
facturer must  not  have  any  control  of  the  silk  as  long  as  the  ware- 
house receipts  are  outstanding.  It  is.  of  course,  possible  to  secure 
possession  of  the  original  warehouse  receipts  by  substituting  other 


234  Bank  and  Trade  Acceptances 

warehouse  receipts  for  the  silk,  but  if  the  manufacturer  desires  to 
take  down  the  silk  without  substitution,  he  should  give  the  bank  the 
cash  value  of  the  silk  taken,  for  the  bank  should  be  secured  either  by 
warehouse  receipts  or  cash  all  the  time  its  acceptance  is  out. 

DRAFTS    DRAWN    FOR   THE    PURPOSE   OF   FURNISHING 

DOLLAR    EXCHANGE 

It  sometimes  happens  that  persons  in  foreign  countries,  having 
obligations  to  meet  in  this  country,  find  it  necessary  to  do  so  by 
means  of  dollar  exchange;  that  is,  to  remit  in  dollars  in  settlement 
of  the  outstanding  obligations. 

The  Federal  Reserve  Board  has  provided  for  such  contingency  and 
permission  is  given  to  banks  thereby  to  accept  drafts  drawn  on  them 
by  banks  in  certain  foreign  countries  for  the  purpose  of  furnishing 
such  dollar  exchange.  It  is  necessary,  however,  for  a  bank  desiring 
to  accept  bills  drawn  for  this  purpose,  to  make  application  to  the  Fed- 
eral Reserve  Board  for  permission  to  do  so.  The  restrictions  sur- 
rounding acceptances  for  this  purpose  are  fully  set  forth  in  the  present 
part  of  the  work  which  discusses  such  classes  of  bank  acceptances. 

TRADE  ACCEPTANCES 

A  trade  acceptance  is  a  draft  drawn  by  the  seller  of  goods  on  the 
purchaser  and  accepted  by  him.  It  must  bear  a  statement  on  its  face 
to  the  effect  that  it  represents  a  purchase  of  goods  by  the  acceptor 
from  the  drawer  of  the  draft. 

Being  drawn  against  actual  current  transactions  and  being  paper 
bearing  at  least  two  names,  preferential  rates  are  made  by  Federal 
Reserve  banks  for  the  rediscount  of  trade  acceptances  as  compared 
with  single  name  paper.  Such  acceptances  may  also  be  purchased  in 
the  open  market.  If  the  acceptance  is  not  paid  at  maturity  and  is 
properly  protested,  recourse  may  be  had  by  the  holder  to  any  indorser 
and  to  the  drawer.  (For  the  discussion  of  the  trade  acceptance,  its 
advantages,  uses,  applications,  etc.,  see  Part  II  of  this  work). 


SECTION  I 

ACCEPTANCES  BASED  UPON  TRANSACTIONS  INVOLVING 
THE  EXPORTATION  OR  IMPORTATION  OF  GOODS 

General  Statutory  Provisions 

Use  of  acceptances  in  foreign  trade. — Any  member  bank  is  per- 
mitted to  accept  drafts  or  bills  of  exchange  which  grow  out  of  trans- 
actions involving  the  exportation  or  importation  of  goods. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Acceptances  Based  Upon  the  Exportation  or  Importa- 
tion OF  Goods 

Character  of  transaction  on  v/hich  acceptances  are  based — Identifi- 
cation of  specific  goods  not  required. — Good  faith  must  be  relied  upon 
to  a  large  extent  in  determining  whether  an  acceptance  is  based  on  a 
transaction  involving  the  importation  or  exportation  of  goods.  A 
member  bank  would  be  justified  in  putting  on  a  notification,  as,  "this 
acceptance  is  based  upon  a  transaction  involving  the  importation  or 
exportation  of  goods,"  provided  it  is  satisfied  that  the  statement  by  its 
customer  is  made  in  good  faith. 

It  is  not  necessary  that  the  specific  goods  covered  by  an  acceptance 
based  upon  an  import  or  export  transaction  be  identified  at  the  time  of 
the  acceptance. 

Member  banks  may  best  protect  themselves  in  determining  whether 
acceptances  are  based  upon  the  exportation  or  importation  of  goods 
by  stipulating  the  right  at  times  to  ask  for  substantiation  of  assur- 
ances from  a  customer. 

Transactions  must  involve  import  or  export  of  goods,  otherwise 
insufficient. — A  transaction  in  order  that  it  may  be  the  basis  of  a  draft 
or  bill  eligible  for  acceptance  by  a  member  bank,  must  in  itself  involve 
the  importation  or  exportation  of  goods.  A  transaction  wholly  inde- 
pendent of  the  transaction  covering  the  importation  or  exportation  of 
goods  is  not  sufficient  basis  for  an  acceptance. 

235 


236  Bank  and  Trade  Acceptances 

Drafts  treated  as  drawn  in  domestic  transactions. — Where  the  con- 
tract between  a  seller  of  goods  who  draws  a  draft  and  the  purchaser 
is  entirely  independent  of  the  contract  for  the  export  of  the  goods, 
the  draft  would  have  to  be  treated  as  drawn  in  a  domestic  transaction 
and  would  have  to  be  accompanied  by  shipping  documents  or  secured 
by  warehouse  receipts  or  other  similar  documents  conveying  or  secur- 
ing title  when  accepted  by  the  drawee  bank. 

Option  to  secure  drafts  as  in  domestic  transactions. — A  dealer  hav- 
ing drawn  drafts  accepted  by  a  member  bank  in  an  export  transaction, 
should  be  given  the  option,  with  the  consent  of  the  accepting  bank, 
to  secure  such  drafts  in  the  manner  required  of  those  drawn  in  domes- 
tic transactions  if  he  wishes  to  use  the  proceeds  derived  from  the  sale 
of  the  goods  exported  for  purposes  other  than  the  payment  of  such 
acceptances. 

Goods  ultimately  intended  for  export  insufficient  basis. — Where  a 
domestic  corporation  "A"  enters  into  a  contract  with  another  domes- 
tic corporation  "B"  to  furnish  materials  to  be  used  by  "B"  in  the 
manufacture  of  products  which  "B"  is  under  contract  to  export,  the 
mere  fact  that  the  material  furnished  is  ultimately  intended  for  export 
in  some  form  cannot  be  said  to  merge  the  two  transactions  into  one. 
The  transaction  between  ''A"  and  "B"  could  not  be  said  to  involve 
the  exportation  of  goods. 

Acceptance  at  the  instance  of  exporter. — If  a  drawee  bank  accepts  at 
the  instance  of  the  purchaser  of  goods,  the  purchaser  having  a  contract 
to  export  such  goods,  the  draft  would  grow  out  of  a  transaction  involv- 
ing the  export  of  goods,  and  could  be  accepted  by  the  drawee  bank. 

Goods  purchased  subsequent  to  acceptance. — Goods  may  be  pur- 
chased and  shipped  subsequent  to  the  time  of  the  first  acceptance, 
provided  there  is  a  definite  bona  fide  contract  for  the  shipment  of  the 
goods  within  a  specified  and  reasonable  time. 

Acceptances  against  future  importation  of  goods. — A  national  bank 
may  accept  a  draft,  drawn  for  the  purpose  of  importing  goods,  whether 
or  not  the  sale  of  the  goods  under  consideration  has  actually  been 
consumated  at  the  time  of  the  acceptance  of  the  draft,  if  the  accepting 


Commercial  Banking  and  Credits  237 

bank  is  assured  that  the  proceeds  of  the  draft  will  ultimately  be  used 
solely  for  ihe  purpose  of  financing  a  transaction  involving  the  importa- 
tion of  goods.  It  is  not  necessary  that  the  goods  to  be  sold  be  identi- 
fied at  the  time  of  acceptance.  The  accepting  bank,  however,  must  be 
reasonably  sure  that  the  draft  is  drawn  for  the  purpose  of  financing 
a  transaction  involving  the  importation  or  exportation  of  goods,  and 
that  its  proceeds  will  be  used  for  that  purpose. 

Delay  in  shipment  of  goods  is  immaterial. — The  fact  that  there  is 
a  temporary  delay  in  actual  shipment  of  goods  is  immaterial,  as  was 
held  in  a  case  of  a  national  bank  which  accepted  a  draft  drawn  upon 
it  in  settlement  of  advances  for  cotton  being  accumulated  by  cotton 
buyers  for  export. 

Acceptance  of  drafts  when  export  contract  not  fulfilled. — A  member 
bank  would  be  justified,  if  fully  secured,  in  accepting  drafts  drawn  by 
a  local  cotton  buying  firm  having  a  contract  to  sell  to  foreign  buyers, 
if  the  transaction,  after  having  been  made  in  good  faith,  ultimately 
resulted  in  the  sale  of  the  cotton  to  an  American  instead  of  a  foreign 
purchaser.  It  was  assumed  in  this  ruling  that  the  bank  had  received 
permission  from  the  Federal  Reserve  Board  to  accept  drafts  or  bills  of 
exchange  drawn  upon  it;  that  the  cotton  buyers  had  a  contract  to  sell 
cotton  to  a  firm  in  Liverpool ;  that  they  held  the  cotton  subject  to 
shipping  receipt  of  the  Liverpool  firm ;  and  that  because  of  freight 
rates  and  shipping  conditions,  the  Liverpool  firm  changed  its  policy 
and  directed  the  sale  of  the  cotton. 

Drafts  drawn  against  collateral  of  acceptances. — An  acceptance 
house  which  has  purchased  an  acceptance  based  on  the  importation 
or  exportation  of  goods  cannot  reimburse  itself  by  drawing  a  bill  upon 
a  national  bank,  pledging  as  collateral  security  for  the  bill  the  original 
acceptance.  The  new  bill  cannot  properly  be  said  to  grow  out  of  the 
original  export  transaction.  Such  a  draft  drawn  under  the  above 
circumstances,  because  it  is  not  an  acceptance  growing  out  of  a  trans- 
action involving  the  importation  or  exportation  of  goods,  nor  drawn 
by  a  bank  or  banker  located  in  a  foreign  country,  nor  growing  out  of  a 
transaction  involving  the  domestic  shipment  or  storage  of  goods,  is 
ineligible. 


238  Bank  and  Trade  Acceptances 


/ 


Acceptance  agreements  of  dealers  in  same  goods  for  export  and 
domestic  sale. — Where  a  dealer  who  is  engaged  in  the  purchase  of  the 
same  character  and  class  of  goods  for  export  and  for  domestic  purposes 
desires  to  finance  the  sale  and  purchase  of  the  goods  to  be  exported, 
his  agreement  with  a  member  bank  accepting  such  draft  should  show 
that  he  has  a  contract  for  the  export  of  the  goods ;  that  the  total 
amount  of  drafts  under  such  credit  will  not  exceed  the  aggregate 
amount  involved  in  the  export  transaction ;  that  the  proceeds  of  the 
drafts  are  to  be  used  in  connection  with  the  export  transaction ;  and 
that  the  proceeds  of  the  sale  of  goods  exported  will  be  applied  in  pay- 
ment of  the  acceptances  unless  the  dealer  has  in  the  meantime  placed 
the  bank  in  funds  to  meet  them  at  maturity,  or  has  secured  such 
acceptances  in  the  manner  required  of  domestic  acceptances. 

Acceptances  against  gold  coin  and  bullion. — Such  acceptances  are 
eligible,  as  gold  coin  and  gold  bars  may  be  properly  considered  as 
goods. 

MATURITY  RELATING  TO  BANK  ACCEPTANCES   BASED 
ON  IMPORTS  AND  EXPORTS 

General  Statutory  Provisions 

Period  of  matturity. — Acceptances  of  member  banks  against  imports 
and  exports  are  limited  to  drafts  "having  not  more  than  six  months' 
sight  to  run,  exclusive  of  days  of  grace." 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Maturity  of  Bank  Acceptances  Based  on  Imports  and 

Exports 

Duration  of  acceptance  credits  may  exceed  six  months. — A  national 
bank  may  enter  into  an  agreement  having  more  than  six  months  to 
run,  by  the  terms  of  which  it  may  obligate  itself  for  a  period  of  time 
specified  in  the  agreement  to  accept  drafts  drawn  upon  it,  provided 
such  drafts  grow  out  of  transactions  involving  the  importation  or 
exportation  of  goods,  and  the  individual  drafts  have  not  more  than 
six  months'  sight  to  run.      This   distinction  is  emphasized  by  the 


Commercial  Banking  and  Credits  239 

Board  in  an  informal  ruling  as  follows:  While  a  letter  of  credit  or 
credit  agreement  may  lawfully  be  made  by  a  national  bank  which  will 
extend  by  its  terms  for  a  period  exceeding  six  months,  the  agree- 
ment must  not  be  of  such  a  character  as  will  impose  upon  the  holders 
of  drafts  accepted  thereunder  any  obligation  to  renew  such  drafts  so 
that  the  period  of  acceptance  shall  exceed  six  months  in  duration  as  to 
any  specified  draft. 

Renewals  of  bank  acceptances  permitted  to  be  made  for  reasonable 
periods. — Upon  payment  of  an  acceptance,  the  accepting  bank  may 
for  a  reasonable  period  accept  new  drafts  for  the  financing  of  the 
original  transaction,  even  after  the  shipment  and  delivery  of  the 
goods,  provided  such  renewals  be  stipulated  in  the  original  contract 
as  an  incidental  condition  of  the  transaction  of  importation  or  exporta- 
tion upon  which  the  acceptance  is  based. 

AMOUNT  BANK  MAY  ACCEPT  FOR  ONE  INTEREST 

General  Statutory  Provisions  in  Connection  With  the  Above  Re- 
lating TO  Bank  Acceptances  Based  on  Imports  and  Exports 

Limitation  of  amount;  exception. — No  member  bank  is  permitted  to 
accept,  whether  in  a  foreign  or  domestic  transaction,  for  any  one  per- 
son, company,  firm,  or  corporation,  to  an  amount  equal  at  any  time  in 
the  aggregate  to  more  than  ten  percentum  of  its  paid  up  and  unim- 
paired capital  and  surplus,  unless  the  bank  is  secured  either  by 
attached  documents  or  by  some  other  actual  security  growing  out  of 
the  same  transaction  as  the  acceptance. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Amount  Bank    May  Accept    for    One  Interest  on 
Transactions  Involving  Exports  and  Imports 

Secured  bills;  accepting  bank  must  remain  secured. — The  ten  per 
cent,  limit  upon  the  amount  of  acceptances  which  any  member  bank 
might  make  for  one  person,  firm,  company,  or  corporation,  does  not 
apply  if  "the  bank  is  secured  either  by  attached  documents  or  by 
some  other  actual  security  growing  out  of  the  same  transaction  as  the 


240  Bank  and  Trade  Acceptances  i 

acceptance."  If  documents,  which  were  attached  at  the  time  of  accept- 
ance, are  surrendered  and  no  other  security  growing  out  of  the  same 
transaction  is  substituted,  the  ten  per  cent,  limit  will  apply.  The 
accepting  bank  must  remain  secured  in  the  same  manner  prescribed 
during  the  life  of  the  acceptance  in  order  to  be  exempt  from  the  ten 
per  cent,  limit.  > 

What  constitutes  actual  security — ^The  only  doubtful  question  is 
as  to  what  constitutes  some  other  actual  security  growing  out  of  the 
same  transaction  as  the  acceptance.  The  ten  per  cent,  limit  does  not 
apply  where  the  acceptor  holds  (i)  shipping  documents,  (2)  ware- 
house receipts,  or 

(3)  Trust  receipts  which  do  not  enable  the  borrower  to  obtain  the 
goods  for  his  own  use. 

The  ten  per  cent,  limit  does  apply  where  the  bank  holds  merely  the 
ordinary  trust  receipt  which  gives  it  only  a  lien  on  the  goods  in  the 
hands  of  the  purchaser  or  on  their  proceeds. 

Trust  receipts  as  actual  security. — If  an  acceptance  is  secured  by 
shipping  documents  which  are  surrendered  by  the  acceptor  for  a  trust 
receipt  which  permits  the  purchaser  of  the  goods  to  retain  control  of 
the  goods,  the  accepting  bank  cannot  be  said  to  be  secured  by  some 
other  actual  security.  A  trust  receipt,  however,  which  does  not  permit 
the  purchaser  to  procure  control  of  the  goods,  may  properly  be  said 
to  be  actual  security. 

Effect  and  relation  of  United  States  Revised  Statutes.  Section  5200 
to  the  ten  per  cent,  limit;  its  application.— A  member  bank  may 
legally  purchase  its  own  acceptance,  but  such  a  transaction  is  equiva- 
lent to  a  loan  or  advance  to  the  customer  for  whom  the  acceptance  is 
made  and  the  liability  of  such  customer  becomes  subject  to  the  limi- 
tations of  Section  5200,  Revised  Statutes.  The  limitation  imposed  by 
Section  5200  of  the  Revised  Statutes  on  the  amount  of  money  which 
may  be  borrowed  by  any  individual  from  a  member  bank  does  not 
apply  to  acceptances  of  said  bank. 

Acceptances  in  addition  to  loans;  exception.— Where  a  national 
bank  has  already  loaned  ten  per  cent,  of  its  capital  and  surplus  to  a 
certain  company,  it  may,  while  the  loan  is  still  outstanding,  obligate 


Commercial  Banking  and  Credits  241 

itself  as  acceptor  of  a  draft  drawn  by  the  same  company.  If,  how- 
ever, a  member  bank  purchases  its  own  acceptance,  it  must  treat  the 
transaction  as  a  loan  and  not  as  an  acceptance,  and  can  not  in  that 
case  lend  to,  and  accept  for,  the  same  firm  in  an  aggregate  amount 
in  excess  of  ten  per  cent,  prescribed  by  Section  5200  of  the  Revised 
Statutes. 

When  drawer  fails  to  provide  funds  to  meet  acceptance. — The  ten 

per  cent,  limit  imposed  by  Section  5200  of  the  Revised  Statutes  is  not 
intended  to  apply  to  the  mere  acceptance  of  a  bill  of  exchange,  but 
the  provision  of  the  section  would  apply  to  the  indebtedness  arising 
between  the  drawer  of  the  bill  and  the  accepting  bank  in  case  the 
drawer  fails  to  furnish  funds  with  which  to  meet  the  acceptance  at 
maturity. 

AGGREGATE  AMOUNT   BANK  MAY  ACCEPT 

General  Statutory  Provisions  in  Connection  With  the  Above  Re- 
lating TO  Transactions  Based  on  the  Importation 
OR  Exportation  of  Goods 

Limitation  of  amount  fifty  per  cent. — No  bank  is  permitted  to  accept 
bills  to  an  amount  equal  at  any  time  in  the  aggregate  to  more  than 
one-half  of  its  unimpaired  capital  stock  and  surplus,  provided,  how- 
ever, that  the  Federal  Reserve  Board,  under  such  general  regulations 
as  it  may  prescribe,  which  shall  apply  to  all  banks  alike,  regardless  of 
the  amount  of  capital  and  surplus,  may  authorize  any  member  bank 
to  accept  such  bills  to  an  amount  not  exceeding  at  the  time  in  the 
aggregate  one  hundred  percentum  of  its  unimpaired  paid  up  capital 
stock  and  surplus. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

In  Connection  with  Aggregate  Amount  Bank  May  Accept 

Application  required  to  be  filed  with  Board  for  power  to  accept  up 
to  one  hundred  per  cent. — Any  member  bank,  having  an  unitn])aire(i 
capital  equal  to  at  least  twenty  percentum  of  its  paid  up  capital,  which 
desires  to  accept  drafts  or  bills  of  exchange  up  to  an  amount  not 


242  Bank  and  Trade  Acceptances 

exceeding  at  any  time  in  the  aggregate  one  hundred  percentum  of  its 
paid  up  capital  stock  and  surplus,  may  file  an  application  for  that 
purpose  with  the  Federal  Reserve  Board,  which  application  must  be 
forwarded  through  the  Federal  Reserve  bank  of  the  district  in  which 
the  applying  bank  is  located. 

Report  on  application  to  be  made  by  Federal  Reserve  bank  to  the 
Board. — The  Federal  Reserve  bank  is  required  to  report  to  the  Fed- 
eral Reserve  Board  upon  the  standing  of  the  applying  bank,  stating 
whether  the  business  and  banking  conditions  prevailing  in  its  district 
warrant  the  granting  of  such  application. 

Reversal  of  approval. — The  approval  of  any  such  application  may  be 
rescinded  upon  ninety  days'  notice  to  the  bank  affected. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
In  Connection  With  Aggregate  Amount  Bank  May  Accept 

No  requirement  of  permission  necessary  to  accept  up  to  fifty  per 
cent. — It  is  not  necessary  to  obtain  the  authority  of  the  Federal 
Reserve  Board  in  the  case  of  member  banks  desiring  to  undertake 
acceptance  business  unless  the  bank  wishes  to  exceed  fifty  per  cent, 
of  its  capital  and  surplus. 

Acceptances  of  correspondents  under  guaranty  of  national  banks. — 
Drafts  accepted  by  foreign  correspondents  at  the  request  and  under 
the  guaranty  of  a  national  bank  in  the  United  States  should  be 
reported  as  a  direct  liability  of  such  national  bank  and  should  be 
treated  as  subject  to  the  limitations  imposed  by  the  Federal  Reserve 
Act  on  the  acceptance  powers  of  national  banks. 

Bank  purchasing  own  acceptances. — When  a  member  bank  pur- 
chases its  own  acceptances  before  maturity,  such  acceptances  need 
not  be  included  in  the  aggregate  of  acceptances  authorized  by  Section 
13  of  the  Federal  Reserve  Act. 

Limitations  of  Section  5202. — The  limitations  imposed  by  Section 
5202,  Revised  Statutes,  on  the  liabilities  incurred  by  any  national 
bank  do  not  apply  to  acceptances  of  such  banks. 


Commercial  Banking  and  Credits 


243 


SUMMARY  OF  BANK  ACCEPTANCES  BASED  ON  IMPORTS 

AND  EXPORTS 

From  the  foregoing,  it  may  be  noted  by  way  of  general  summary, 
that: 

1.  A  member  bank  may  not  accept  bills  to  a  greater  amount  than 
fifty  per  cent,  of  its  capital  and  surplus,  unless  the  Federal  Reserve 
Board  has  authorized  it  to  accept  to  one  hundred  per  cent. 

2.  The  amount  of  domestic  bills  accepted  shall  in  no  event  exceed 
fifty  per  cent,  of  capital  and  surplus. 

3.  Acceptances  purchased  by  the  accepting  banks  are  exempt  from 
the  above  limitations. 


BANK  ACCEPTANCES  EXECUTED  TO  FURNISH  DOLLAR 

EXCHANGE 

General  Statutory  Provisions 

Acceptances  executed  to  furnish  dollar  exchange. — Any  member 
bank  may  accept  drafts  or  bills  of  exchange  drawn  upon  it  having  not 
more  than  three  months'  sight  to  run,  exclusive  of  days  of  grace, 
drawn  under  regulations  to  be  prescribed  by  the  Federal  Reserve 
Board  by  banks  or  bankers  in  foreign  countries,  or  dependencies,  or 
insular  possessions  of  the  United  States,  for  the  purpose  of  furnishing 
dollar  exchange  as  required  by  the  usages  of  trade  in  the  respective 
countries,  dependencies  or  insular  possessions. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Ix  Connection  With  Bank  Acceptances  Executed  to  Furnish 

Dollar  Exchange 

Application  for  permission  to  accept. — Any  member  bank  desiring 
to  accept  drafts  drawn  by  banks  or  bankers  in  foreign  countries  or 
dependencies  or  insular  possessions  of  the  United  States  for  the  pur- 
pose of  furnishing  dollar  exchange  must  first  make  an  application  to 
the  Federal  Reserve  Board  setting  forth  the  usages  of  trade  in  the 
respective  countries,  dependencies,  or  insular  possessions  in  which 
said  banks  or  bankers  are  located. 

Conditions  upon  which  approval  will  be  made. — If  the  Federal 
Reserve  Board  should  determine  that  the  usages  of  trade  in  such 
countries,  dependencies,  or  possessions,  require  the  granting  of  the 
acceptance  facilities  applied  for,  it  will  notify  the  applying  bank  of 
its  approval  and  will  also  publish  in  the  Federal  Reserve  bulletin  the 
name  or  names  of  those  countries,  dependencies,  or  possessions,  in 
which  banks  or  bankers  are  authorized  to  draw  on  member  banks 
whose  applications  have  been  approved  for  the  purpose  of  furnishing 
dollar  exchange.     The  Federal  Reserve  Board  reserves  the  right  to 

244 


Commercial  Banking  and  Credits  245 

modify,  or  on  ninety  days'  notice,  to  revoke  its  approval  either  as  to 
any  particular  member  bank  or  as  to  any  foreign  country  or  depend- 
ency or  insular  possession  of  the  United  States  in  which  it  has  author- 
ized banks  or  bankers  to  draw  on  member  banks  for  the  purpose  of 
furnishing  dollar  exchange. 

ANNOUNCEMENTS  OF  THE  FEDERAL  RESERVE  BOARD 

The  purpose  of  this  Act  and  the  regulations  made  pursuant  thereto 
was  to  enable  the  American  banks  to  provide  dollar  exchange  in  coun- 
tries where  the  check  is  not  the  current  means  of  remittance  in  pay- 
ment of  foreign  debts,  but  where  the  three  months'  banker's  draft  is 
generally  used  for  that  purpose.  The  banker's  custom  of  selling  three 
months'  drafts  in  preference  to  checks  originated  in  countries  where 
the  mail  connections  were  irregular  and  the  foreign  exchange  market 
was  a  limited  one,  and  where  it  would  have  been  difficult  for  him 
to  draw  in  time  to  forward  it  by  the  same  mail,  whereas,  in  draw- 
ing the  three  months'  draft,  he  would  feel  assured  of  being  able  to 
forward  remittances  before  his  obligation  fell  due.  Such  conditions 
do  not  exist  between  England  and  France  and  the  United  States. 
Member  banks  are  now  permitted  to  accept  foreign  drafts  drawn 
upon  them  by  banks  or  bankers  in  the  following  countries :  Porto 
Rico,  Santo  Domingo,  Costa  Rico,  Peru,  Chili,  Brazil,  Venezuela, 
Argentina,  Bolivia,  Columbia,  Ecquador,  Nicarauga,  Trinidad  and 
Urugway. 

It  is  understood  in  connection  with  the  above  that  such  drafts  are 
to  be  drawn  for  the  purpose  of  furnishing  dollar  exchange  as  required 
by  the  usages  of  trade  in  the  respective  countries. 

MATURITY  IN  CONNECTION  WITH  BANK  ACCEPTANCES 
EXECUTED  TO  FURNISH  DOLLAR  EXCHANGE 

Period  of  maturity. — Member  banks  may  accept  drafts  drawn  to 
furnish  dollar  exchange  having  not  more  than  three  months'  sight  to 
run,  exclusive  of  days  of  grace. 

AMOUNT  ACCEPTABLE  BY  ONE  MEMBER  BANK  FOR  ONE 

INTEREST 

Limitation  of  per  cent. — No  member  bank  is  permitted  to  accept 
drafts  or  bills  of  exchange  executed  to  furnish  dollar  exchange  for 


246  Bank  and  Trade  Acceptances 

any  one  bank  to  an  amount  exceeding-  in  the  aggregate  ten  percentum 
of  the  paid  up  and  unimpaired  capital  and  surplus  of  the  accepting 
bank  unless  the  draft  or  bill  of  exchange  is  accompanied  by  docu- 
ments conveying  or  securing  title  or  by  some  other  adequate  security. 

AGGREGATE  AMOUNT  MEMBER  BANK  MAY  ACCEPT 

In  Connection  with  Bank  Acceptances  Executed  to  Furnish 

Dollar  Exchange 

Limitation  of  per  cent. — No  member  bank  is  permitted  to  accept 
such  drafts  or  bills  of  exchange  in  an  amount  exceeding  at  any  time 
in  the  aggregate  one-half  of  its  paid  up  and  unimpaired  capital  and 
surplus. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

In  Connection  with  Aggregate  Amount  Member  Bank  May  Accept 

Separate  limits  on  the  two  classes  of  acceptances. — The  fifty  per 
cent,  limit  imposed  upon  the  amount  of  drafts  which  a  member  bank 
may  accept  for  the  purpose  of  furnishing  dollar  exchange,  is  separate 
and  distinct  from,  and  not  included  in  the  limits  imposed  by  Section 
13,  upon  the  amount  of  drafts  or  bills  of  exchange  drawn  against  a 
shipment  of  goods  or  against  warehouse  receipts  covering  readily 
marketable  staples  which  a  member  bank  may  accept.  Member  banks 
may,  therefore,  accept  such  bills  even  though  their  acceptances  for 
other  purposes  aggregate  fifty  per  cent,  (or  one  hundred  per  cent.) 
of  their  capital  and  surplus.  The  limitations  imposed  by  Section  5202 
Revised  Statutes,  and  the  liabilities  incurred  by  any  national  bank  do 
not  apply  to  acceptances  of  such  banks. 


BANK  ACCEPTANCES  BASED  ON  DOMESTIC  SHIPMENTS 

OF  GOODS 

General  Statutory  Provisions 

Bank  acceptances  in  domestic  trade. — Any  member  bank  may  accept 
drafts  drawn  upon  it  which  grow  out  of  transactions  involving  the 
domestic  shipments  of  goods  provided  shipping  documents  conveying 
or  securing  title  are  attached  at  the  time  of  acceptance. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Bank  Acceptances  Based  on  Domestic  Shipments  of 

Goods 

Shipping  documents. — Documents  conveying  or  securing  title  which 
are  an  essential  part  of  the  transaction  based  on  the  domestic  ship- 
ment of  goods  must  be  made  out  or  endorsed  so  as  to  convey  or  secure 
title  to  the  accepting  bank. 

Documents  not  required  to  be  physically  attached. — The  fact  that 
Section  13  provides  that  shipping  documents  should  be  "attached" 
should  not  be  construed  so  as  to  require  the  documents  to  be  physi- 
cally fastened  to  the  draft.  It  is  sufificient  if  the  accepting  bank  has 
possession  of  the  documents  at  the  time  of  acceptance.  If  placed  in 
possession  of  the  bank's  agent  and  under  control  of  the  bank,  such 
documents  could  clearly  be  considered  as  in  its  possession. 

Transaction  not  required  to  involve  sale  of  goods. — A  member  bank 
may  accept  a  draft  drawn  against  a  shipment  of  goods  from  a  corpora- 
tion to  its  agent  or  bank  even  though  no  sale  of  the  goods  is  involved 
in  the  transaction.  In  any  case  where  a  draft  is  drawn  against  a  ship- 
ment of  goods  in  a  transaction  which  does  not  involve  the  sale  of 
those  goods,  the  maturity  of  the  draft  should  approximate  the  dura- 
tion of  their  transit.     In  such  a  case,  the  law  contemplates  that  the 

247 


248  Bank  and  Trade  Acceptances 

acceptance  of  the  draft  should  be  for  the  purpose  of  financing  the  ship- 
ment, and  that  it  should  not  be  by  the  means  of  furnishing  a  credit  for 
any  other  purpose. 

Acceptance  must  arise  out  of  actual  transaction. — A  draft  which  has 
been  drawn  by  the  purchaser  of  the  goods  against  a  national  bank  is 
not  eligible  for  acceptance  by  that  bank  merely  because  it  is  secured 
by  a  bill  of  lading  covering  the  goods  bought.  The  law  contemplates 
some  actual  connection  between  the  acceptance  of  the  draft  and  the 
transaction  involving  the  sale  and  shipment  of  the  goods,  that  is,  it  is 
evidently  intended  that  the  draft  should  be  drawn  to  finance  that 
transaction.  If  a  seller  ships  goods  and  mails  the  bill  of  lading  to  the 
purchaser,  and  on  arrival  of  the  bill  of  lading  the  purchaser  draws  on 
his  own  bank  attaching  the  bill  of  lading  as  security  and  offers  it  for 
acceptance,  the  transaction  is  merely  a  straight  loan  to  the  drawer 
secured  by  a  bill  of  lading. 

Retention  or  release  of  shipping  documents  against  acceptance. — 

The  bank  is  believed  to  have  the  right,  if  it  becomes  necessary  to  do  so, 
to  release  either  the  shipping  document  or  warehouse  receipt,  pro- 
vided the  draft  or  drafts  accepted  by  one  person  do  not  exceed  ten 
per  cent,  of  the  capital  and  surplus  of  the  accepting  bank.  This  is  a 
question,  however,  which  should  be  determined  by  the  bank  itself. 

Retention  or  release  of  warehouse  receipts  against  acceptance. — 

It  has  been  ruled  proper  for  a  bank  not  to  release  warehouse  receipts 
other  than  in  exceptional  cases,  this  being  purely  a  matter  of  agree- 
ment as  between  the  bank  and  its  customers.  The  Federal  Reserve 
bank,  in  rediscounting  such  acceptances,  may  reasonably  take  into 
consideration  the  question  of  whether  or  not  they  are  secured  or  unse- 
cured at  the  time  they  are  offered  for  rediscount. 

Maturity  in  Connection  WiTk  Bank  Acceptances 
Based  on  Domestic  Shipments  of  Goods 

General  Statutory  Provisions 

Period  of  maturity. — Any  member  bank  may  accept  such  drafts 
drawn  upon  it  having  not  more  than  six  months'  sight  to  run,  exclu- 
sive of  days  of  grace. 


Commercial  Banking  and  Credits  249 

OPINIONS  OF  COUNSEL  AND  RULINGS 

In   Connection  with   Maturity  of  Bank   Acceptances  Based  on 

Domestic  Shipments  of  Goods 

Duration  of  letters  of  credit. — The  agreement  must  not  be  of  such 
a  character  as  will  impose  upon  the  holders  of  the  drafts  accepted 
thereunder  any  obligation  to  renew  such  drafts  so  that  the  period  of 
acceptance  shall  exceed  six  months  in  duration  as  to  the  specified  time, 
notwithstanding  the  fact  that  a  letter  of  credit  or  credit  agreement 
made  by  a  national  bank  extends  for  a  period  of  six  months. 

(See  "Bank  Acceptances  Based  on  Imports  and  Exports"  for 
"Amount  Bank  May  Accept  for  One  Interest"). 

AGGREGATE  AMOUNT  BANK  MAY  ACCEPT 

Aggregate  amount  bank  may  accept  up  to  one  hundred  per  cent. — 

No  bank  is  permitted  to  accept  such  bills  to  an  amount  equal  at  any 
time  in  the  aggregate  to  more  than  one-half  of  its  unimpaired  and 
paid  up  capital  stock  and  surplus,  provided,  however,  that  the  Federal 
Reserve  Board  under  such  general  regulations  which  it  may  pre- 
scribe, which  shall  apply  to  all  banks  alike  regardless  of  the  capital 
stock  and  surplus,  may  authorize  any  member  bank  to  accept  such 
bills  to  an  amount  not  exceeding  at  any  time  in  the  aggregate  one  hun- 
dred percentum  of  its  paid  up  and  unimpaired  capital  stock  and  sur- 
plus, and  provided  further,  that  the  aggregate  of  acceptances  growing 
out  of  domestic  transactions  shall  in  no  event  exceed  fifty  percentum 
of  its  capital  stock  and  surplus. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Aggregate  Amount  Bank  May  Accept 

Bank  purchasing  own  acceptances. — When  a  member  bank  pur- 
chases its  own  acceptances  before  maturity,  such  acceptances  need 
not  be  included  in  the  aggregate  of  acceptances  authorized  by  Sec- 
tion 13. 

Section  5202  inapplicable  to  acceptances. —  The  hmitations  imposed 
by  Section  5202  Revised  Statutes  on  the  liabilities  incurred  by  any 
national  bank  do  not  apply  to  acceptances  of  such  banks. 


BANK  ACCEPTANCES  SECURED  BY  WAREHOUSE 

RECEIPTS 

General  Statutory  Provisions 

Acceptances  by  member  banks. — Any  member  bank  may  accept 
drafts  or  bills  of  exchange  drawn  upon  it  which  are  secured  at  the  time 
of  acceptance  by  a  warehouse  receipt  or  other  such  document  con- 
veying or  securing  title  covering  readily  marketable  staples. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Bank  Acceptances  Secured  by  Warehouse  Receipts 

Eligible  Security 

Warehouse  receipts  required  to  be  issued  by  warehouses  independent 
of  borrower. — Warehouse  receipts  offered  as  security  for  bills  accepted 
by  member  banks  must  be  issued  by  warehouses  which  are  independent 
of  the  borrower.  Where  a  corporation  is  formed  as  a  subterfuge  for 
the  purpose  of  evading  the  spirit  of  the  Board's  ruling,  this  fact  should 
be  taken  into  consideration  by  a  member  bank  accepting  the  bill  and 
by  the  Federal  Reserve  bank  to  which  it  is  offered  for  discount. 

If  the  borrower  exercises  such  control  over  the  corporation  issuing 
the  warehouse  receipt  as  to  give  him  control  over  the  goods  in  stor- 
age, the  purpose  of  requiring  a  receipt  of  the  independent  warehouse- 
man would  be  defeated.  The  corporation  issuing  such  rceipt  must  be 
organized  in  good  faith  as  an  independent  corporation  and  its  affairs 
must  be  administered  by  duly  authorized  officers  and  agents  inde- 
pendent of  the  borrower. 

Relation  between  warehouse  corporation  and  borrower. — Where  a 
separate  corporation  has  been  created  and  the  warehouse  receipts  are 
issued  by  that  corporation  and  not  by  the  borrower,  the  requirements 
of  the  Board  would  appear  to  have  been  met.  However,  where  both 
corporations  have  practically  the  same  officers,  the  manager  of  the 

250 


Commercial  Banking  and  Credits  251 

warehouse  appointed  to  execute  the  receipts  should  not  be  an  employee 
of  the  borrowing  company,  as  the  Board  requires  that  the  receipts 
should  be  issued  by  a  company  independent  of  the  borrower,  and  this 
requirement  should  be  met  in  substance  as  well  as  in  form. 

Control  of  warehouse  by  acceptors'  representatives. — An  informal 
ruling  has  been  made  by  the  Board  in  connection  with  the  following: 
A  borrowing  corporation  takes  receipts  for  goods  and  materials  stored 
in  a  warehouse  controlled  by  a  separate  corporation  engaged  solely  in 
the  warehouse  business,  the  entire  stock  of  which  is  owned  by  the 
prospective  borrower.  If  a  representative  of  the  accepting  bank  is 
given  control  of  the  warehouse  under  a  proper  resolution  of  the  direc- 
tors of  the  warehouse  corporation,  the  fact  that  the  stock  of  the  cor- 
poration is  owned  by  the  borrower  should  not  prevent  the  acceptance 
of  drafts  secured  by  the  warehouse  receipts.  It  should  be  agreed, 
however,  that  if  by  any  future  action  of  the  warehouse  corporation  an 
attempt  is  made  to  exercise  control  over  the  warehouse,  the  represen- 
tative of  the  acceptor  should  have  the  right  to  move  the  goods  and  to 
place  them  in  storage  elsewhere  at  the  expense  of  the  warehouse  cor- 
poration. 

Warehouse  receipts  issued  by  lessee. — A  can  goods  concern  pro- 
poses to  place  part  of  its  readily  marketable  goods  and  materials  in 
storage  with  a  lessee  of  part  of  its  premises.  The  lessee  is  then  to 
issue  warehouse  receipts  to  the  owner  of  the  goods,  which  receipts  are 
to  be  issued  as  security  for  drafts  drawn  against  and  accepted  by  a 
member  bank. 

If  the  premises  in  question  are  actually  turned  over  to  the  lessee 
under  a  bona  fide  lease,  the  lessee  being  independent  of  the  borrower 
and  having  entire  custody  and  control  of  the  goods,  there  would  seem 
to  be  no  objection  to  a  member  bank  accepting  drafts  against  the 
security  of  warehouse  receipts  issued  by  such  lessee.  It  should,  how- 
ever, be  expressly  understood  and  agreed  that  the  borrower  shall  not 
have  access  to  the  premises  except  with  the  permission  of  the  lessee 
and  that  he  shall  exercise  no  control  of  any  sort  over  the  goods  against 
which  warehouse  receipts  are  issued.  The  warehouse  receipts  must, 
of  course,  be  in  form  to  properly  convey  and  secure  title  to  the  bank. 

Receipts  of  custodian  of  wool  as  a  warehouse  receipt. — Custodian's 
certificate  or  receipt,  if  issued  in  proper  form  to  convey  or  secure  title, 


2C2  Bank  and  Trade  Acceptances 

may  be  treated  as  a  warehouse  receipt  and  acceptance  of  member  bank 
under  such  conditions  would  be  eligible  for  rediscount.  The  wool^  in 
the  above  case  was  stored  in  buildings  under  control  of  custodian 
entirely  independent  of  borrower. 

Ineligible  Security 

Chattel  mortgages.— Drafts  or  bills  of  exchange  drawn  in  domestic 
transactions  against  a  national  bank  cannot  be  accepted  when  secured 
by  a  chattel  mortgage  on  cattle,  but  only  when  accompanied  by  ship- 
ping documents  or  when  secured  by  a  warehouse  receipt  or  other 
similar  document  conveying  or  security  title  to  readily  marketable 

staples. 

While  cattle  may  be  treated  as  readily  marketable  staples,  a  chattel 
mortgage  is  not  considered  a  document  similar  to  a  warehouse  receipt, 
since  the  borrower  retains  the  possession  of  the  goods  and  conveys 
to  the  bank  only  the  legal  title. 

Collateral  notes  secured  by  chattel  mortgages. — A  national  bank 
is  not  authorized  to  accept  a  draft  secured  by  collateral  notes  which 
are  in  turn  secured  by  chattel  mortgages  on  cattle. 

Member  banks  are  not  authorized  to  accept  drafts  of  a  cattle-loan 
company  secured  by  notes  of  the  owner  of  the  cattle,  although  such 
notes  may  be  secured  by  a  chattel  mortgage  accompanying  the  draft  at 
the  time  of  acceptance. 

Bills  of  sale. — A  bill  of  sale  is  not  a  receipt  similar  to  a  warehouse 
or  terminal  receipt.  It  is  merely  in  substance  a  chattel  mortgage  of 
goods  in  the  hands  of  the  drawer  and  not  a  receipt  for  goods  sold  in 
the  hands  of  some  third  party  "independent  of  the  borrower." 

Security  not  specified. — The  acceptance  of  a  draft  by  a  member  bank 
against  an  acceptance  agreement  which  purports  to  assign  to  the  bank 
certain  collateral  security,  but  which  does  not  specifically  mention  any 
security  as  assigned,  is  an  ordinary  accommodation  acceptance  and  is 
not  authorized  by  law. 

Substitution  of  Warehouse  Receipts 

Substitution. — It  is  held  that  there  is  no  objection  to  permitting 
mills  to  substitute  other  warehouse  receipts  for  cotton  receipts  during 
the  life  of  an  acceptance. 


Commercial  Banking  and  Credits 


253 


MATURITY 

(For  maturity  see  "Bank  Acceptances  Based  on  Domestic  Ship- 
ments of  Goods"). 

AMOUNT  BANK  MAY  ACCEPT  FOR  ONE  INTEREST 

(Regarding  the  above,  see  "Bank  Acceptances  Based  on  Imports 
and  Exports"). 

AGGREGATE  AMOUNT  BANK  MAY  ACCEPT 

(See  "Bank  Acceptances  based  on  Domestic  Shipments  of  Goods"). 


INVESTMENTS  IN  ACCEPTANCES  BY  MEMBER  BANKS 

General  Statutory  Provisions 

U.  S.  Revised  Statutes,  Section  5200,  as  Amended 

Ten  per  cent,  limit  on  liability  of  any  one  interest  to  a  national  bank; 
exceptions. — The  total  liabilities  to  any  association,  of  any  person,  or 
of  any  company,  corporation,  or  firm  for  money  borrowed,  including 
any  liabilities  of  a  company  or  firm,  and  the  liabilities  of  the  several 
members  thereof,  shall  at  no  time  exceed  ten  percentum  of  the  amount 
of  the  capital  stock  of  such  association,  actually  paid  in  and  unim- 
paired, and  ten  percentum  of  its  unimpaired  surplus  fund;  provided, 
however,  that: 

1.  The  discount  of  bills  of  exchange  drawn  in  good  faith  against 
actually  existing  values ; 

2.  The  discount  of  commercial  or  business  paper  actually  owned  by 
the  person,  company,  corporation,  or  firm,  negotiating  the  same;  and 

3.  The  purchase  or  discount  of  any  note  or  notes  secured  by  not 
less  than  a  like  face  amount  of  bonds  of  the  United  States  issued  since 
April  24,  1917,  or  certificates  of  indebtedness  of  the  United  States; 
shall  not  be  considered  as  money  borrowed  within  the  meaning  of  this 
section;  but  the  total  liabilities  to  any  association,  of  any  person,  or 
of  any  company,  corporation,  or  firm,  upon  any  note  or  notes  pur- 
chased or  discounted  by  such  association  and  secured  by  such  bonds 
or  certificates  of  indebtedness  shall  not  exceed  (except  to  the  extent 
permitted  by  rules  and  regulations  prescribed  by  the  Comptroller  of 
the  Currency,  with  the  approval  of  the  Secretary  of  the  Treasury)  ten 
percentum  of  such  capital  stock  and  surplus  fund  of  such  association. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

In  Connection  with  Investments  in  Acceptances  by  Member  Banks 
Purchase  or  Discount  of  Acceptances  of  Other  Banks 

Bills  of  exchange  include  bank  acceptances. — Bills  of  exchange  may 
be  taken  as  including  acceptances,  since  a  bill  does  not  lose  its  char- 
acteristics as  such  when  accepted  by  the  drawee. 

254 


Commercial  Banking  and  Credits  255 

Bills  discounted  before  acceptance. — A  bill  of  exchange  discounted 
before  acceptance  may  be  said  to  be  drawn  against  actually  existing 
value  only  when  it  is  accompanied  by  shipping  documents,  warehouse 
receipts,  or  other  papers  securing  title  to  the  goods  sold. 

Bills  secured  by  shipping  documents  or  pledge  of  goods. — A  bill 
secured  by  shipping  documents,  or  by  the  pledge  of  goods  actually 
sold,  might  be  discounted  by  a  member  bank  before  acceptance  with- 
out being  subject  to  the  limitations  imposed  by  Section  5200,  since 
this  would  constitute  a  bill  drawn  in  good  faith  against  actually  ex- 
isting value. 

Bills  discounted  after  acceptance. — If  the  bill  is  discounted  after 
acceptance  it  may  be  treated  as  drawn  against  actually  existing  values, 
if  drawn  against  the  drawee  at  the  time  of,  or  within  a  reasonable  time 
after,  the  shipment  or  delivery  of  the  goods  sold.  There  must  be 
reasonable  grounds  to  believe,  at  the  time  the  bill  is  drawn,  that  the 
goods  are  in  existence  in  the  hands  of  the  drawee  either  in  their  origi- 
nal form  or  in  the  shape  of  the  proceeds  of  their  sale. 

Acceptance  discounted  after  removal  of  attached  documents. — When 
such  bill  has  been  accepted  by  the  drawee  and  the  documents  attached 
have  been  removed,  though  the  direct  obligation  of  the  drawee  to  pay 
such  bill  at  maturity  may  be  said  to  be  substituted  for  the  "actual 
value"  against  which  the  bill  was  originally  drawn,  nevertheless,  when 
discounted  by  a  bona  fide  owner  for  value,  its  discount  would  not  be 
subject  to  the  limitations  of  Section  5200  since  it  would  still  come 
within  the  classification  of  commercial  or  business  paper  actually 
owned  by  the  person  negotiating  the  same. 

Should  the  drawee  who  accepts  the  bill,  however,  attempt  to  dis- 
count it  with  a  member  bank  it  would  be  subject  to  the  limitations  of 
Section  5200  since  in  that  case  the  party  primarily  liable  would  in 
effect  borrow  money  from  the  bank  on  its  own  obligation. 

Discount  of  acceptances  as  business  paper. — It  is  held  by  the  Board 
that  if  a  firm  is  a  bona  fide  owner  for  value  of  the  acceptances  of  any 
particular  institution  and  such  acceptances  are  sold  to  or  discounted 
with  a  member  bank,  the  acceptances  could  no  doubt  be  treated  as 


256  Bank  and  Trade  Acceptances 

commercial  or  business  paper  actually  owned  by  the  party  negotiating 
them  and  would  therefore  be  excepted  from  the  limitations  imposed 
by  Section  5200,  Revised  Statutes. 

Purchase  by  National  Bank  of  Its  Own  Acceptances 

Bank  permitted  to  purchase  its  own  acceptances. — A  member  bank 
may  legally  purchase  its  own  acceptances,  but  such  a  transaction  is 
equivalent  to  a  loan  or  advance  to  the  customer  for  which  the  accept- 
ance is  made  and  the  liability  of  such  customer  becomes  subject  to 
the  limitations  of  Section  5200  of  the  Revised  Statutes. 

Exemptions  from  limitations  of  Section  13. — When  a  bank  purchases 
its  own  acceptances  before  maturity,  such  acceptance  need  not  be 
included  in  the  aggregate  of  acceptances  authorized  by  Section  13. 

Reissue  of  acceptances. — When  a  bank  buys  its  own  acceptances, 
they  are  to  be  recorded  as  loans  subject  to  the  limitations  of  Section 
5200  and  the  right  of  the  bank  to  resell  or  reissue  such  acceptances, 
is,  in  the  opinion  of  counsel,  fully  recognized  by  the  authorities  and 
where  this  is  done,  they  may  be  treated  as  acceptances  outstanding 
and  not  as  loans. 

Rediscount  of  such  acceptances. — An  acceptance  which  has  been 
purchased  by  the  accepting  bank  and  subsequently  rediscounted  with 
its  Federal  Reserve  bank  is  not  subject  to  the  limitations  of  Section 
5200  of  the  Revised  Statutes. 


SYNDICATE  ACCEPTANCE   CREDITS 

Policy  of  Federal  Reserve  Board. — The  Federal  Reserve  Board  has 
issued  a  memorandum  stating  its  policy  in  dealing  with  acceptances 
drawn  under  credits  extending  over  a  period  of  one  or  two  years, 
which  is  reviewed  in  the  following. 

Authorization ;  duration  of  credits ;  rate ;  character ;  approval  of  Fed- 
eral Reserve  Board. — In  this  memorandum,  the  Board  authorized  the 
banks,  during  a  period  which  may  be  declared  ended  at  any  time,  to 
proceed  upon  certain  principles  which  may  be  summed  up  as  follows: 

1.  Acceptance  credits  open  for  periods  in  excess  of  ninety  days 
should  only,  in  exceptional  cases,  extend  over  a  period  of  more  than 
one  year,  and  in  no  case  for  a  time  exceeding  two  years. 

2.  Banks  which  are  members  of  groups  opening  these  credits  should 
not  buy  their  own  acceptances,  and  where  an  agreement  is  made  with 
the  drawer  for  the  purchase  of  acceptances  for  future  delivery,  the  rate 
should  not  be  a  fixed  one,  but  should  be  based  upon  the  rate  ruling 
at  the  time  of  the  sale. 

3.  Transactions  covered  by  these  credits  should  be  of  a  legitimate 
commercial  nature,  and  acceptances  must  be  eligible  according  to  the 
rules  and  regulations  of  the  Board. 

4.  Whenever  syndicates  are  formed  for  the  purpose  of  granting 
acceptance  credits  for  more  than  moderate  amounts,  Federal  Reserve 
banks  should  be  consulted  with  regard  to  the  transaction.  The  ques- 
tion of  eligibility,  both  from  the  standpoint  of  the  character  of  the 
goods  and  of  the  amount  involved,  will  be  passed  upon  by  the  Federal 
Reserve  bank,  subject  to  the  approval  in  each  case  of  the  Federal 
Reserve  Board. 

Quantity  as  well  as  quality  the  controlling  factors. — It  must  be 
understood,  in  passing  ujjon  these  transactions,  that  not  only  quality 
but  also  quantity  must  be  the  controlling  factors.  The  aggregate  of 
these  acceptances  should  not  be  permitted  to  constitute  the  greater 
portion  of  outstanding  acceptances  at  any  time,  and  it  must  be  undcr- 

257 


258 


Bank  and  Trade  Acceptances 


stood  that  while  the  Federal  Reserve  banks  and  the  Federal  Reserve 
Board  might  look  w^ith  favor  upon  a  transaction  as  long  as  the  total 
amount  involved  is  not  excessive,  transactions  of  exactly  the  same 
character  may  be  ruled  out  whenever  the  aggregate  amount  of  out- 
standing acceptances  of  this  character  becomes  in  the  opinion  of  the 
Federal  Reserve  Board,  unduly  large. 


COMMERCIAL  BANKING  AND  CREDITS 

OPEN  MARKET  TRANSACTIONS  IN 
ACCEPTANCES,  BILLS  OF  EXCHANGE  AND  CABLE 

TRANSFERS 


SECTION  II 

OPEN  MARKET  TRANSACTIONS  IN  ACCEPTANCES,  BILLS 
OF  EXCHANGE  AND  CABLE  TRANSFERS 

General  Statutory  Provisions 

Cable  transfers,  bank  acceptances  and  bills  of  exchange. — Any  Fed- 
eral Reserve  bank  may,  under  rules  and  regulations  prescribed  by  the 
Federal  Reserve  Board,  purchase  and  sell  in  the  open  market,  at  home 
or  abroad,  either  from  or  to  domestic  or  foreign  banks,  firms,  corpo- 
rations, or  individuals,  cable  transfers  and  bankers'  acceptances  and 
bills  of  exchange,  of  the  kinds  and  maturities  by  the  Federal  Reserve 
Act  made  eligible  for  rediscount,  with  or  without  the  indorsement  of 
a  member  bank. 

Commercial  bills. — Every  Federal  Reserve  bank  shall  have  power 
to  purchase  from  member  banks  and  to  sell  with  or  without  its  in- 
dorsement, bills  of  exchange  arising  out  of  commercial  transactions, 
as  hereinafter  defined.  (See  General  Regulations  and  Rulings,  fol- 
lowing). 

GENERAL  REGULATIONS  AND   RULINGS 

Relating  to  Open  Market  Transactions 

Conditions  governing  eligibility. — The  Federal  Reserve  Board,  ex- 
ercising its  statutory  right  to  regulate  the  purchase  of  bills  of  ex- 
change and  acceptances,  has  determined  that  a  bill  of  exchange  or 
accejitance  to  be  eligible  for  purchase  by  Federal  Reserve  banks, 

(a)  Must  not  have  been  issued  for  carrying  or  trading  in  stocks, 
bonds,  or  other  investment  securities,  except  bonds  and  notes  of  the 
Government  of  the  United  States; 

(b)  Must  not  be  a  bill  the  proceeds  of  which  have  been  used  or  are 
to  be  used  for  permanent  or  fixed  investments  of  any  kind,  such  as 

261 


262  Bank  and  Trade  Acceptances 

land,  buildings,  or  machinery,  or  for  investments  of  a  merely  specu- 
lative character ; 

(c)  Must  have  been  accepted  by  the  drawee  prior  to  purchase  by  a 
Federal  Reserve  bank  unless  it  is  accompanied  and  secured  by  ship- 
ping documents  or  by  a  v^arehouse,  terminal  or  other  similar  receipt 
conveying  or  security  title ; 

(d)  May  be  secured  by  the  pledge  of  goods,  wares,  merchandise,  or 
agricultural  products,  including  live  stock,  provided  it  is  otherwise 
eligible. 

In  addition  to  the  above  general  requirements,  each  bill  of  exchange 
and  trade  acceptance  purchased  under  the  terms  of  this  regulation  must 
also  conform  to  the  following: 

To  be  eligible  for  purchase,  the  bill  must  have  arisen  out  of  an 
actual  commercial  transaction,  domestic  or  foreign ;  that  is,  it  must 
be  a  bill  which  has  been  issued  or  drawn  for  agricultural,  industrial 
or  commercial  purposes,  or  the  proceeds  of  which  have  been  used  or 
are  to  be  used  for  the  purpose  of  producing,  purchasing,  carrying,  or 
marketing  goods  in  one  or  more  of  the  steps  of  the  process  of  produc- 
tion, manufacture,  or  distribution.  It  must  have  a  maturity  at  time 
of  purchase  of  not  more  than  ninety  days,  exclusive  of  days  of  grace. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Open  Market  Transactions 

Promissory  notes  not  included. — Regarding  the  eligibility  of  prom- 
issory notes,  the  Federal  Reserve  Board  has  reached  the  conclusion, 
in  which  it  is  sustained  by  opinion  of  counsel,  that  promissory  notes, 
even  though  bearing  an  additional  indorsement,  must  be  regarded  as 
excluded  from  open  market  purchases. 

Eligible  paper. — There  remain,  therefore,  as  eligible  for  purchase, 
"cable  transfers"  and  "bills  of  exchange,"  the  latter  being  of  two 
kinds,  first,  so-called  foreign  bills  of  exchange,  and  second,  domestic 
acceptances  drawn  by  one  party  on  another,  as  for  instance,  by  a  seller 
of  goods  upon  the  purchaser,  giving  rise  to  a  trade  acceptance,  either 
accepted  or  not  accepted  at  the  time  of  purchase.  Whether  the  Fed- 
eral Reserve  banks  should  engage  in  such  open  market  transactions 
rests  entirely  with  them  and  not  with  the  Federal  Reserve  Board. 


Commercial  Banking  and  Credits  263 

Banks  are  cautioned  that  no  bill  be  bought  in  the  open  market,  which, 
if  indorsed  by  a  member  bank,  would  otherwise  be  ineligible  for  re- 
discount under  Section  13  of  the  Federal  Reserve  Act.  (See  General 
Regulations  and  Rulings,  preceding). 

Promissory  notes  not  eligible. — Promissor}^  notes,  as  distinguished 
from  bills  of  exchange,  whether  of  one  or  more  names,  are  not  eligible 
for  such  purchase. 

Eligibility  of  commodity  paper. — The  purchase  of  commodity  loans 
from  member  banks  without  their  indorsement  would  not  come  within 
the  provisions  of  the  law  unless  there  is  two  name  commodity  paper 
or  such  paper  can  be  created  in  connection  with  commodity  loans. 

TRANSACTIONS  IN  BANK  ACCEPTANCES 
IN  THE  OPEN  MARKET 

Definition  of  bankers'  acceptances. — A  banker's  acceptance  is  a  bill 
of  exchange,  of  which  the  acceptor  is  a  bank  or  trust  company,  or  a 
firm,  person,  company,  or  corporation,  engaged  in  the  business  of 
granting  bankers'  acceptance  credits. 

ELIGIBLE  BANK  ACCEPTANCES 

General  Statutory  Provisions 

Cable  transfers  and  bankers'  acceptances. — Any  Federal  Reserve 
bank  may  purchase  and  sell  cable  transfers  and  bankers'  acceptances 
of  the  kinds  and  maturities  by  the  Federal  Reserve  Act  made  eligible 
for  rediscount,  with  or  without  the  indorsement  of  a  member  bank. 
(See  Regulations  following). 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Conditions  governing  eligibility. — To  be  eligible  for  purchase,  the 
bill  must  have  been  drawn  under  a  credit  open  for  the  purpose  of  con- 
ducting or  settling  accounts  resulting  from  a  transaction  or  transac- 
tions involving: 

(i)  The  shipment  of  goods  between  the  United   States  and  any 


264  Bank  and  Trade  Acceptances 

foreig-n  country,  or  between  the  United  States  and  any  of  its  depend- 
encies or  insular  possessions  or  between  foreign  countries ; 

(2)  The  shipment  of  goods  within  the  United  States,  provided  the 
bill  at  the  time  of  its  acceptance  is  accompanied  by  shipping  docu- 
ments ; 

(3)  The  storage  within  the  United  States  of  readily  marketable 
goods,  provided  the  acceptor  of  the  bill  is  secured  by  warehouse,  ter- 
minal or  other  similar  receipt; 

(4)  The  storage  within  the  United  States  of  g-oods  which  have 
been  actually  sold,  provided  the  acceptor  of  the  bill  is  secured  by  the 
pledge  of  such  goods  ; 

(5)  It  must  be  a  bill  drawn  by  a  bank  or  banker  in  a  foreign  country, 
or  dependency,  or  insular  possession  of  the  United  States,  for  the 
purpose  of  furnishing  dollar  exchange.  The  bank  or  banker  in  the 
latter  case  drawing  the  bill  must  be  in  a  country,  dependency,  or  pos- 
session, whose  usages  of  trade  have  been  determined  by  the  Federal 
Reserve  Board  to  require  the  drawing  of  bills  of  this  character. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Eligible  Bank  Acceptances 

Accepted  commercial  paper  secured  by  bullion  shipments. — Gold 
bars  may  be  considered  as  goods,  and,  therefore,  sixty  day  bills,  when 
accepted  by  banks  and  bankers  against  such  shipments,  would  be 
eligible  for  purchase  by  Federal  Reserve  banks  as  based  upon  or  in- 
volving the  exportation  of  goods.  Gold  coin  may  also  be  properly 
considered  as  goods,  and,  therefore,  a  bill  of  exchange  drawn  to  finance 
a  shipment  of  gold  coin  from  this  country  is  eligible  for  purchase  by 
a  Federal  Reserve  bank  if  otherwise  in  conformity  with  the  provisions 
of  the  law  and  the  regulations  of  the  Federal  Reserve  Board. 

INELIGIBLE  BANK  ACCEPTANCES 

Opinions  of  Council  and  Rulings 

Acceptances  not  based  on  sales  and  not  secured,  ineligible. — Accept- 
ances which  are  drawn  by  a  manufacturer  and  accepted  by  a  trust 
company,  not  a  member  of  the  Federal  Reserve  System,  the  proceeds 


Commercial  Banking  and  Credits  265 

of  which  are  to  be  used  for  purchases  of  raw  material  and  payment 
for  labor,  where  the  goods  have  not  been  sold,  and  no  warehouse 
receipts  or  other  instruments  could  be  furnished,  are  held  not  to  be 
eligible  for  purchase  by  a  Federal  Reserve  bank. 

Acceptances  secured  by  bill  of  sale  ineligible. — A  banker's  accept- 
ance drawn  for  the  purpose  of  purchasing  goods  secured  by  a  bill  of 
sale  of  stock  in  hand  is  not  eligible  for  purchase  by  Federal  Reserve 
banks. 

Bills  payable  outside  the  United  States  ineligible. — Under  the  reg- 
ulations of  the  Federal  Reserve  Board  defining  bankers'  acceptances, 
any  bill  which  is  payable  elsewhere  than  in  the  United  States  would 
not  be  eligible  for  purchase  as  a  banker's  acceptance,  even  though 
eligible  in  all  other  respects,  but  might,  however,  be  purchased  as  a 
bill  of  exchange  payable  in  a  foreign  country. 

EVIDENCE  OF  ELIGIBILITY  AND  REQUIREMENT  OF 

STATEMENTS 

Regulations  of  the  Federal  Reserve  Board 

Evidence  of  eligibility ;  exception  of  bills  accepted  by  national  banks. 

A  Federal  Reserve  bank  must  be  satisfied  either  by  reference  to  the 
acceptance  itself,  or  otherwise,  that  it  is  eligible  for  purchase.  Satis- 
factory evidence  of  eligibility  may  consist  of  a  stamp  or  certificate 
affixed  by  the  acceptor  in  form  satisfactory  to  the  Federal  Reserve 
bank.  No  evidence  of  eligibility  is  required  with  respect  to  a  bill 
accepted  by  a  national  bank. 

Requirement  of  statements. — Bankers'  acceptances,  other  than  those 
accepted  or  indorsed  by  member  banks,  shall  be  eligible  for  purchase 
only  after  the  acceptor  has  furnished  a  satisfactory  statement  of 
financial  condition  in  form  to  be  approved  by  the  Federal  Reserve 
Board,  and  has  agreed  in  writing  with  a  Federal  Reserve  bank  to 
inform  it  upon  request  concerning  the  transactions  underlying  such 
acceptances. 


266  Bank  and  Trade  Acceptances 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Evidence  of  Eligibility  and  Requirement  of  State- 
ments 

Responsibility  for  eligibility;  statement  required  to  be  satisfactory 
in  form. — Ultimate  responsibility  in  purchasing  acceptances  is  held  to 
rest  with  Federal  Reserve  banks.  The  announcement  that  the  Fed- 
eral Reserve  Board  will  require  statements  satisfactory  to  it  in  con- 
nection with  acceptances  is  held  to  mean  that  the  statement  shall  be 
satisfactory  in  form. 

MATURITY 
General  Statutory  Provisions 

Maturity. — Any  Federal  Reserve  bank  may  purchase  and  sell  cable 
transfers  and  bankers'  acceptances  of  the  kinds  and  maturities  made 
eligible  for  rediscount  by  the  Federal  Reserve  Act. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Requirements  as  to  maturity. — To  be  eligible  for  purchase,  the  bill 
must  have  a  maturity  at  the  time  of  purchase  of  not  more  than  three 
months,  exclusive  of  the  days  of  grace. 

TRANSACTIONS  IN  BILLS  OF  EXCHANGE  AND  TRADE 

ACCEPTANCES 

Definition  of  bill  of  exchange. — The  regulations  of  the  Federal  Re- 
serve Board  define  a  bill  of  exchange  to  be  an  unconditional  order  in 
writing,  addressed  by  one  person  to  another,  other  than  a  banker, 
signed  by  the  person  giving  it,  requiring  the  person  to  whom  it  is 
addressed  to  pay,  in  the  United  States,  at  a  fixed  or  determinable 
future  time,  a  sum  certain  in  dollars  to  the  order  of  a  specified  person. 

Definition  of  trade  acceptance. — A  simple  definition  of  a  trade  accep- 
tance would  be  a  bill  of  exchange  drawn  by  the  seller  on  the  pur- 
chaser of  goods  sold,  and  accepted  by  such  purchaser. 


Commercial  Banking  and  Credits  267 

ELIGIBLE  BILLS  AND  TRADE  ACCEPTANCES 
General  Statutory  Provisions 

Eligible  bills. — Any  Federal  Reserve  bank  may  purchase  and  sell  in 
the  open  market  bills  of  exchange  of  the  kinds  and  maturities  made 
eligible  for  rediscount  by  the  Federal  Reserve  Act.  (See  Regulations 
following) . 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

General  conditions  of  eligibility. — A  bill  of  exchange  or  acceptance 
to  be  eligible  for  purchase  by  Federal  Reserve  banks,  (i)  must  have 
been  accepted  by  the  drawee  prior  to  purchase  by  a  Federal  Reserve 
bank  unless  it  is  accompanied  and  secured  by  shipping  documents,  or 
by  a  warehouse,  terminal  or  other  similar  receipt  conveying  or  secur- 
ing title ; 

(2)  May  be  secured  by  the  pledge  of  goods,  wares,  merchandise  or 
agricultural  products,  including  live  stock,  provided  it  is  otherwise 
eligible.  Each  bill  of  exchange  and  trade  acceptance  purchased  must 
also,  in  addition  to  the  above  requirements,  conform  to  the  more 
specific  requirements  set  forth  in  the  following: 

To  be  eligible  for  purchase,  bills  must  have  arisen  out  of  an  actual 
commercial  transaction,  domestic  or  foreign ;  that  is,  it  must  be  a  bill 
which  has  been  issued  or  drawn  for  agricultural,  industrial  or  com- 
mercial purposes,  or  the  proceeds  of  which  have  been  used  or  are  to 
be  used  for  the  purpose  of  producing,  purchasing,  carrying  or  market- 
ing goods  in  one  or  more  of  the  steps  of  the  process  of  production, 
manufacture  or  distribution,  and  must  have  a  maturity  at  the  time  of 
purchase  of  not  more  than  ninety  days  exclusive  of  days  of  grace, 

INELIGIBLE   BILLS  AND  TRADE  ACCEPTANCES 

Regulations  of  Federal  Reserve  Board 

Finance  paper. — To  be  eligible  for  purchase  by  l''cdcral  Reserve 
banks,  a  bill  of  exchange  or  acceptance  must  not  have  been  issued  for 
carrying  on  trading  in  stocks,  bonds,  or  other  investment  securities, 
except  bonds  and  notes  of  the  government  of  the  United  States ;  and 
must  not  be  a  bill  the  proceeds  of  which  have  been  used  or  are  to  be 


268  Bank  and  Trade  Acceptances 

used  for  permanent  or  fixed  investments  of  any  kind,  such  as  land, 
buildings,  or  machinery,  or  for  investments  of  a  merely  speculative 
character. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Ineligible  Bills  and  Trade  Acceptances 

Drafts  drawn  on  corporation  by  agent  ineligible. — Instruments  in 
the  form  of  bills  of  exchange,  drawn  by  an  agent  of  a  corporation  upon 
the  corporation  itself,  are  not  bills  of  exchange,  such  as  are  eligible 
for  purchase  in  the  open  market  by  Federal  Reserve  banks. 

Paper  stamped  "trade  acceptance"  of  no  value  as  such. — The  fact 
that  a  land  company  has  stamped  a  bill  a  "trade  acceptance"  and  has 
accepted  such  bill  does  not  in  itself  make  it  a  trade  acceptance. 

EVIDENCE  OF  ELIGIBILITY  AND  REQUIREMENT  OF 

STATEMENTS 

Regulations  of  Federal  Reserve  Board 

Evidence  of  eligibility;  requirement  of  statements. — A  Federal  Re- 
serve bank  shall  take  such  steps  as  it  deems  necessary  to  satisfy  itself 
as  to  the  eligibility  of  the  bill  offered  for  purchase  unless  it  presents 
prima  facie  evidence  thereof  or  bears  a  stamp  or  certificate  affixed  by 
the  acceptor  or  drawer  showing  that  it  is  a  trade  acceptance.  A  bill 
is  not  eligible  for  purchase  unless  indorsed  by  a  member  bank,  and  in 
case  there  is  no  indorsement  by  such  member  bank,  a  satisfactory 
statement  of  the  financial  condition  of  one  or  more  of  the  parties 
thereto  must  be  furnished. 

MATURITY 

General  Statutory   Provisions  and  Regulations  of  the   Federal 

Reserve  Board 

Any  Federal  Reserve  bank  may  purchase  and  sell  bills  of  exchange 
of  the  kinds  and  maturities  by  the  Federal  Reserve  Act  made  eligible 
for  rediscount,  and  in  any  case,  such  maturities  must  not  exceed  ninety 
days,  exclusive  of  days  of  grace,  at  the  time  of  purchase. 


COMMERCIAL  BANKING  AND  CREDITS 

ADVANCES  BY 
FEDERAL  RESERVE  BANKS 


SECTION  III 

COMMERCIAL    BANKING   AND    CREDITS 

Advances  By 
Federal  Reserve  Banks 

1.  General  Statutory  Provisions. 

2.  Security. 

3.  Maturity. 

General  Statutory  Provisions 

Maturity;  security;  eligible  paper;  U.  S.  obligations. — Any  Federal 
Reserve  bank  may  make  advances  to  its  member  banks  on  their  prom- 
issory notes  for  a  period  not  exceeding  fifteen  days,  at  rates  to  be 
established  by  such  Federal  Reserve  banks,  subject  to  the  review  and 
determination  of  the  Federal  Reserve  Board,  provided  such  promissory 
notes  are  secured  by  such  notes,  drafts,  bills  of  exchange,  or  bankers' 
acceptances  as  are  eligible  for  rediscount  or  for  purchase  by  Federal 
Reserve  banks  under  the  provisions  of  the  Federal  Reserve  Act,  or 
by  the  deposit  or  pledge  of  bonds  or  notes  of  the  United  States. 

SECURITY 

Advances  on  bonds  or  notes  of  the  United  States. — Any  Federal 
Reserve  bank  may  make  advances  to  member  banks  on  their  promis- 
sory notes,  secured  either  by  such  notes,  drafts,  bills  of  exchange,  or 
bankers'  acceptances  as  are  eligible  for  rediscount  or  purchase  by 
Federal  Reserve  banks,  or  by  the  deposit  or  pledge  of  bonds  or  notes 
of  the  United  States. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Security  on  Advances  by  Federal  Reserve  Banks 

Indorsement  of  collateral. — Eligible  paper  pledged  as  security  for 
a  promissory  note  of  a  member  bank  on  which  an  advance  is  being 
made  by  a  Federal  Reserve  bank  need  not  be  indorsed  by  such  member 
bank  if  such  eligible  paper  is  already  in  negotiable  form. 

271 


272  Bank  and  Trade  Acceptances 

Collateral  of  Government  bonds. — Any  member  bank  which  has 
itself  purchased  obligations  of  the  United  States  may  procure  advances 
from  its  Federal  Reserve  bank  for  not  exceeding  fifteen  days  on  its 
own  promissory  note,  provided  such  note  is  secured  by  a  deposit  or 
pledge  of  bonds  or  notes  of  the  United  States. 

County  warrants  ineligible. — County  warrants  are  not  eligible  as 
security  for  advances  by  Federal  Reserve  banks.  Member  banks,  in 
procuring  advances  from  Federal  Reserve  banks  on  promissory  notes, 
must  secure  such  notes  by  paper  eligible  for  rediscount,  or  for  pur- 
chase by  Federal  Reserve  banks,  or  by  bonds  or  notes  of  the  United 
States. 

Farm  loan  bonds  ineligible. — Farm  loan  bonds  being  issued  by  Fed- 
eral farm  land  banks,  which  are  incorporated  under  Federal  law,  are 
not  obligations  of  the  United  States,  and  are,  therefore,  not  eligible 
as  collateral  for  promissory  notes  of  member  banks. 

For  conditions  governing  eligibility  of  acceptances,  drafts  and  notes, 
see  "Rediscount  of  promissory  notes ;  eligible  drafts  and  trade  accep- 
tances;  eligible  agricultural  paper;  eligible  commodity  paper;  eligible 
bank  acceptances." 

MATURITY 

General  Statutory  Provisions 

Period  for  which  advances  may  be  made. — Any  Federal  Reserve 
bank  may  make  advances  to  its  member  banks  on  their  promissory 
notes  for  periods  not  exceeding  fifteen  days. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Notes  due  on  Sunday  or  legal  holiday. — If  by  reason  of  a  State  law, 
paper  falling  due  on  Saturday  or  Sunday  must  be  collected  one  or  two 
days  before  its  apparent  maturity  or  one  or  two  days  thereafter,  in- 
terest should  be  charged  accordingly. 

Renewals. — Renewals  may  properly  be  made  by  Federal  Reserve 
banks  on  fifteen  day  notes  of  the  member  banks  if  properly  secured. 


Commercial  Banking  and  Credits 


273 


provided  that  the  Federal  Reserve  bank  does  not  obligate  itself  in 
advance  to  make  any  such  renewal. 

An  informal  ruling  of  the  Federal  Reserve  Board  in  connection  with 
renewals  is  to  the  efifect  that  the  Federal  Reserve  Board  does  not  wish 
to  prohibit  the  renewal  of  fifteen  day  notes  but  feels  that  renewals 
should  be  the  exception  rather  than  the  rule. 


COMMERCIAL  BANKING  AND  CREDITS 

REDISCOUNTS  OF 

ACCEPTANCES,  DRAFTS  AND  BILLS   OF  EXCHANGE 

WITH  THE  FEDERAL  RESERVE  BANKS 


SECTION  IV 

COMMERCIAL  BANKING  AND  CREDITS 

Rediscounts  With  Federal  Reserve  Banks  of  Acceptances,  Notes 

AND  Bills  of  Exchange 

General  Statutory  Provisions 

Rediscount  of  notes,  drafts,  bills  of  exchange,  commercial,  agriciil- 
tural  and  commodity  paper. — Notes,  drafts  and  bills  of  exchange  may 
be  discounted  by  member  banks  of  the  Federal  Reserve  System  with 
Federal  Reserve  banks,  governed  by  the  following  provisions : 

Upon  the  indorsement  of  any  of  its  member  banks,  which  shall  be 
a  waiver  of  demand,  notice,  and  protest  by  such  bank  as  to  its  own 
indorsement  exclusively,  any  Federal  Reserve  bank  may  discount 
notes,  drafts  and  bills  of  exchange  arising  out  of  actual  commercial 
transactions ;  that  is,  notes,  drafts  and  bills  of  exchange  issued  or 
drawn  for  agricultural,  industrial,  or  commercial  purposes,  or  the  pro- 
ceeds of  which  have  been  used,  or  are  to  be  used  for  such  purposes, 
the  Federal  Reserve  Board  to  have  the  right  to  determine  or  define 
the  character  of  the  paper  thus  eligible  for  discount.  Notes,  drafts 
and  bills  of  exchange  secured  by  staple  agricultural  products,  or  other 
goods,  wares  or  merchandise,  are  also  to  be  considered  as  eligible  for 
discount. 

Classes  of  ineligible  paper. — Notes,  drafts  or  bills  covering  merely 
investments  or  issued  or  drawn  for  the  purpose  of  carrying  on  trading 
in  stocks,  bonds,  or  other  investment  securities,  except  bonds  and 
notes  of  the  government  of  the  United  States,  are  ineligible. 

Maturity  of  eligible  paper. — Notes,  drafts  and  bills  admitted  to  dis- 
count must  have  a  maturity  at  the  time  of  discount  of  not  more  than 
ninety  days,  exclusive  of  days  of  grace.  Notes,  drafts  and  bills  drawn 
or  issued  for  agricultural  purposes  or  i)ased  on  live  stock  and  having 
a  maturity  not  exceeding  six  months,  exclusive  of  days  of  grace,  may 
be  discounted  in  an  amount  to  be  limited  to  a  percentage  of  the  assets 

277 


278  Bank  and  Trade  Acceptances 

of  the  Federal  Reserve  bank  to  be  ascertained  and  fixed  by  the  Fed- 
eral Reserve  Board. 

Amount  rediscountable  by  one  bank  for  any  one  interest. — The  ag- 
gregate amount  of  such  notes,  drafts  and  bills  bearing  the  signature 
or  indorsement  of  any  one  borrower,  whether  a  company,  person,  firm, 
or  corporation,  rediscountable  for  any  one  bank,  shall  at  no  time  exceed 
ten  per  cent,  of  the  unimpaired  capital  and  surplus  of  the  bank; 
but  this  restriction  shall  not  apply  to  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing  values. 

Bank  acceptances  eligible  for  rediscount. — Any  Federal  Reserve 
bank  may  discount  acceptances  of  the  kinds  hereinafter  described, 
which  have  a  maturity  at  the  time  of  discount  of  not  more  than  three 
months'  sight,  exclusive  of  days  of  grace,  and  which  are  indorsed  by 
at  least  one  member  bank.     Such  acceptances  may: 

(i)  Grow  out  of  transactions  involving  the  importation  or  exporta- 
tion of  goods ; 

(2)  Grow  out  of  transactions  involving  the  domestic  shipment  of 
goods,  provided  shipping  documents  conveying  or  securing  title  are 
attached  at  the  time  of  acceptance ; 

(3)  Must  be  secured  at  the  time  of  acceptance  by  a  warehouse 
receipt  or  other  such  document  conveying  or  securing  title,  covering 
readily  marketable  staples ; 

(4)  Arise  out  of  the  drawing  of  drafts  or  bills  of  exchange  issued  for 
the  purpose  of  furnishing  dollar  exchange. 

Rediscounts  for  member  State  banks. — No  Federal  Reserve  bank  is 
permitted  to  discount  for  any  (member)  State  bank  or  trust  company 
notes,  drafts,  or  bills  of  exchange,  of  any  one  borrower  who  is  liable 
for  borrowed  money  to  such  State  bank  or  trust  company  in  an  amount 
greater  than  ten  per  cent,  of  the  capital  and  surplus  of  such  State  bank 
or  trust  company,  but  the  discount  of  bills  of  exchange  drawn  against 
actually  existing  value  and  the  discount  of  commercial  or  business 
paper  actually  owned  by  the  person  negotiating  the  same  shall  not  be 
considered  as  borrowed  money. 

Conditions  attached  to  rediscounts  by  Federal  Reserve  banks. — Fed- 
eral Reserve  banks,  as  a  condition  of  the  discount  of  notes,  drafts  and 


Commercial  Banking  and  Credits  279 

bills  of  exchange,  for  such  State  bank  or  trust  company,  shall  require 
a  certificate  or  guaranty  to  the  effect  that  the  borrower  is  not  liable 
to  such  bank  in  excess  of  ten  per  cent,  of  the  unimpaired  capital  and 
surplus  of  such  bank,  and  will  not  be  permitted  to  become  liable  in 
excess  of  this  amount  while  such  notes,  drafts  and  bills  of  exchange 
are  under  discount  with  the  Federal  Reserve  banks. 

Discounts  for  non-members. — No  member  bank  is  permitted  to  act 
as  the  medium  or  agent  of  a  non-member  bank  in  applying  for  or 
receiving  discounts  from  a  Federal  Reserve  bank,  except  by  permis- 
sion of  the  Federal  Reserve  Board. 

Discounts  and  rediscounts  subject  to  regulations  of  Federal  Reserve 
Board. — The  discount  and  rediscount  and  the  purchase  and  sale  by 
any  Federal  Reserve  bank  of  any  bills  receivable  and  of  domestic  and 
foreign  bills  of  exchange,  and  of  acceptances  authorized  by  the  Fed- 
eral Reserve  Act,  are  subject  to  such  restrictions,  limitations  and  reg- 
ulations as  may  be  imposed  by  the  Federal  Reserve  Board. 

Applications  for  rediscount;  requirement  of  certificate  of  member 
bank. — All  applications  for  the  rediscount  of  notes,  drafts,  or  bills  of 
exchange  must  contain  a  certificate  of  the  member  bank,  in  form  to 
be  prescribed  by  the  Federal  Reserve  bank,  that,  to  the  best  of  its 
knowledge  and  belief,  such  notes,  drafts,  or  bills  of  exchange  have 
been  issued  for  one  or  more  of  the  purposes  governing  eligibility  as 
set  forth  in  the  regulations  of  the  Federal  Reserve  Board. 

REDISCOUNT  OF  PROMISSORY  NOTES 

Definition  of  promissory  note. — A  promissory  note  is  defined  as  an 
unconditional  promise,  in  writing,  signed  by  the  maker,  to  pay,  in  the 
United  States,  at  a  fixed  or  determ.inable  future  time,  a  sum  certain 
in  dollars  to  order  or  to  bearer. 

CLASSES  OF  NOTES  ELIGIBLE 

General  Statutory  Provisions 

Commercial  paper;  definition  of  eligible  notes. — l",ligil)le  notes  are 
defined  in  the  law  as  follows:     Notes,  drafts  and  bills  of  exchange 


28o  Bank  and  Trade  Acceptances 

issued  or  drawn  for  agricultural,  industrial,  or  commercial  purposes, 
or  the  proceeds  of  which  have  been  used  or  are  to  be  used  for  such  pur- 
poses. The  Federal  Reserve  Board  has  the  right  to  determine  or 
define  the  character  of  the  paper  thus  eligible  for  rediscount. 

Agricultural  and  commodity  paper. — Notes,  drafts  and  bills  of  ex- 
change secured  by  staple  agricultural  products,  or  other  goods,  wares, 
or  merchandise,  are  eligible  for  rediscount. 

Paper  based  on  United  States  obligations.— Notes,  drafts,  or  bills 
issued  or  drawn  for  the  purpose  of  carrying  on  trading  in  bonds  and 
notes  of  the  government  of  the  United  States  are  included  in  the 
classes  of  promissory  notes  eligible  for  rediscount. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Relating  to  Eligible  Classes  of  Promissory  Notes 

Definition  of  commercial  paper  eligible  for  rediscount. — ^The  Fed- 
eral Reserve  Board,  exercising  its  statutory  right  to  define  the  char- 
acter of  a  note,  draft,  or  bill  of  exchange  eligible  for  rediscount  at  a 
Federal  Reserve  bank,  has  determined  that  it  must  be  a  note,  draft,  or 
bill  of  exchange,  the  proceeds  of  which  have  been  used  or  are  to  be 
used  in  producing,  purchasing,  carrying  or  marketing  goods,  wares, 
or  merchandise  in  one  or  more  of  the  steps  of  the  process  of  produc- 
tion, manufacture  or  distribution.  The  paper  may  be  secured  by  the 
pledge  of  goods  or  collateral  provided  it  is  otherwise  eligible. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Eligible  Classes  of  Promissory  Notes 

Loans  to  individuals. — Federal  Reserve  banks  do  not  make  loans 
directly  to  individuals,  but  rediscount  the  paper  of  member  banks 
which  include  all  national  banks  and  such  State  banks  which  may 
have  joined  the  Federal  Reserve  System. 

Notes  Based  on  Production  and  Distribution  of  Goods 

Paper  of  waterworks  company. — The  ninety  day  paper  of  a  water- 
works company,  the  proceeds  of  which  have  been  used,  or  are  to  be 


Commercial  Banking  and  Credits  281 

used  to  provide  funds  for  pay-roll,  purchases  of  coal,  etc.,  is  eligible  for 
rediscount  by  a  Federal  Reserve  bank  if  the  paper  otherwise  conforms 
to  the  law  and  the  provisions  of  the  Board's  regulations. 

Notes  of  farmers. — Farmers'  notes,  the  proceeds  of  which  are  to  be 
used  for  tilling  farms  or  for  draining  land  already  in  use  as  farm  land, 
should  be  classified  as  agricultural  paper  and  are  eligible  for  redis- 
count. 

Assignment  of  open  accounts  ineligible. — The  assignment  of  an 
open  account  is  not  negotiable  paper  and  is  therefore  not  eligible  for 
rediscount  by  a  Federal  Reserve  bank. 

Discount  of  renewal  notes. — In  an  informal  ruling  of  the  Federal 
Reserve  Board,  the  following  is  mentioned  in  connection  with  the  dis- 
count of  renewal  notes :  Self-liquidating  paper,  even  though  the 
transaction  which  gives  rise  to  it  does  not  liquidate  itself  within  the 
ninety  day  maturity,  might  be  discounted  even  though  it  appears  to 
be  renewal  paper.  Banks  should  not  enter  into  an  agreement  for  a 
renewal,  and  care  should  be  exercised  in  examining  such  paper,  and 
the  transactions  which  give  rise  to  it,  but  mechanical  rules  should  not 
be  allowed  to  take  the  place  of  discriminating  banking  judgment. 

Secured  notes ;  eligibility  tested  by  use  of  funds. — The  eligibility  of 
a  note  for  rediscount  is  determined  l)y  the  use  of  the  funds  derived 
from  the  original  negotiation  of  the  note.  The  collateral  security  of 
the  note  may  indicate  its  use,  but  the  form  of  collateral  is  otherwise 
immaterial.  A  note  may,  therefore,  be  secured  by  railroad  stocks  and 
bonds,  Intt  the  proceeds  might  be  used  for  agricultural,  industrial  or 
commercial  purposes,  in  which  event  the  note  would  be  eligible  for 
rediscount,  although  it  would  not  be  so  if  the  proceeds  were  used  to 
I)urchase  or  carry  the  railroad  stocks  and  bonds. 

Notes  secured  by  collateral. — Notes  secured  by  collateral,  the  pro- 
ceeds of  which  have  been  used  or  are  to  be  used  for  commercial  pur- 
poses, and  which  otherwise  comply  with  the  regulations,  are  eligible 
for  rediscount.  The  fact  that  commercial  paper  has  the  additional 
security  of  collateral  in  uo  way  affects  its  eligibility  f(jr  rediscount 


282  Bank  and  Trade  Acceptances 

Collateral  of  mortgages. — A  note,  draft,  or  bill  of  exchange,  drawn 
for  commercial  purposes  and  otherwise  eligible  for  rediscount  is  not 
rendered  ineligible  merely  because  it  is  secured  by  a  mortgage  on  real 
estate. 

Paper  secured  by  bills  receivable. — The  note  of  a  manufacturer  se- 
cured by  his  bills  receivable  is  desirable  paper,  and  is  not  debarred 
as  a  collateral  trust  note. 

Eligible  security  not  sufHcient. — A  note,  even  though  secured  by 
eligible  paper,  is  not  itself  eligible  for  rediscount,  unless  issued  for 
an  agricultural,  commercial  or  industrial  purpose. 

Offerings  considered  upon  their  merits;  rediscounts  for  insolvent 
banks. — A  Federal  Reserve  bank  is  not  obliged  to  give  assurance 
to  a  receiver  of  an  insolvent  member  bank  that  it  will  upon  the 
reopening  of  the  insolvent  bank  rediscount  its  eligible  paper  freely, 
without  requiring  the  indorsement  of  directors  or  other  additional 
sescurity. 

Notes  secured  by  food  products. — Paper  secured  by  staple  perish- 
able food  products,  such  as  butter,  cheese,  eggs,  poultry,  frozen  fish, 
etc.,  carried  for  reasonable  periods,  in  cold  storage,  on  negotiable 
warehouse  receipts,  is  eligible,  if  offered  with  the  indorsement  of  a 
member  bank  at  the  usual  rate  for  ninety  day  commercial  paper. 

Notes  secured  by  pig-iron. — The  note  of  a  furnace  company,  secured 
by  pig-iron,  manufactured  by  the  company  on  contract  for  delivery, 
is  eligible  for  rediscount,  but  the  Federal  Reserve  bank  upon  being 
offered  such  paper  may  scrutinize  each  case  according  to  its  merits. 

Notes  based  on  United  States  obligations. — A  Federal  Reserve  bank 
may  discount  a  note,  draft,  or  bill  of  exchange,  indorsed  by  a  member 
bank,  which  is  issued  or  drawn  for  the  purpose  of  carrying  on  trading 
in  bonds  or  notes  of  the  United  States.  The  statement  of  law  that 
the  definition  of  eligible  paper  shall  not  include  notes,  drafts  or  bills 
of  exchange  drawn  for  the  purpose  of  carrying  on  trading  in  stocks, 
bonds  or  other  government  securities,  except  bonds  and  notes  of  the 


Commercial  Banking  and  Credits  283 

government  of  the  United  States,  is  equivalent  to  an  affirmative  decla- 
ration of  the  eligibility  of  such  notes  based  on  United  States  obliga- 
tions. Any  member  bank  which  has  loaned  money  to  any  of  its 
customers  for  the  purpose  of  carrying  on  trading  in  bonds  or  notes  of 
the  United  States  may  rediscount  with  its  Federal  Reserve  bank  the 
bill  or  note  of  its  customer,  provided  such  bill  or  note  conforms  to  the 
following  conditions  governing  eligibility : 

(i)  Has  a  maturity  at  the  time  of  discount  of  not  more  than  ninety 
days,  exclusive  of  days  of  grace ; 

(2)   Has  the  indorsement  of  the  member  bank. 

Such  bill  or  note,  however,  need  not  necessarily  be  secured  and  need 
not  be  drawn  for  a  commercial  purpose  other  than  for  the  purpose  of 
carrying  on  trading  in  notes  or  bonds  of  the  United  States. 

Relation  of  maturity  to  eligibility. — A  member  bank,  acting  through 
another  member  bank,  may  obtain  the  discount  of  its  paper,  secured 
by  government  bonds,  for  a  period  as  long  as  ninety  days,  although  a 
member  bank  acting  alone  may  not  tender  its  collateral  note  to  the 
Federal  Reserve  bank  which  runs  for  more  than  fifteen  days.  A 
country  bank  which  has  regular  dealings  with  a  large  bank  in  a  city 
may  send  its  note  secured  by  government  bonds  to  that  bank,  and  the 
Board  would  regard  the  note  as  eligible  for  rediscount  by  the  city 
bank. 

Notes  of  non-member  banks. — If  the  proceeds  of  a  note  have  been 
used  or  are  to  be  used  to  carry  on  trading  in  United  States  obligations, 
the  note,  if  acquired  in  good  faith,  should  be  eligible  for  rediscount 
with  the  indorsement  of  the  member  bank,  whether  it  is  executed  by  a 
member  bank  or  by  a  non-member  bank. 

CLASSES  OF  NOTES  INELIGIBLE 

General  Statutory  Trovisions 

Security  paper  ineligible. — Eligible  pai)cr  shall  not  include-  notes, 
drafts  or  bills  covering  merely  investments  or  issued  or  drawn  for  the 
purpose  of  carrying  on  trading  in  stocks,  bonds  or  other  investment 
securities,  except  bonds  and  notes  of  the  United  .States. 


284  Bank  and  Trade  Acceptances 

REGULATIONS  OF  FEDERAL  RESERVE  BOARD 

Relating  to  Ineligible  Classes  of  Promissory  Notes 

Notes  for  permanent,  fixed  or  speculative  investments. — A  note, 
draft,  or  bill  of  exchange,  the  proceeds  of  which  have  been  used  or  are 
to  be  used  for  permanent  or  fixed  investments  of  any  kind,  such  as 
lands,  buildings,  or  machinery,  are  ineligible.  The  paper  must  also 
not  be  a  note,  draft,  or  bill  of  exchange,  the  proceeds  of  which  have 
been  used  or  are  to  be  used  for  investments  of  a  purely  speculative 
character. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Ineligible  Classes  of  Promissory  Notes 
Renewals  and  Extensions 

Discount  of  renewal  notes. — Banks  should  not  enter  into  an  agree- 
ment for  renewal.  Banking  judgment  is  necessary  in  determining 
the  merits  of  each  renewal.  Those  providing  working  capital  or  to 
finance  fixed  investments  are  not  eligible  for  rediscount. 

Extension  of  time. — A  note  or  draft  containing  a  provision  for  an 
extension  of  time  should  not  be  approved  for  general  use  by  the  Fed- 
eral Reserve  Board. 

Financial  paper;  notes  to  replace  funds  withdravsm  ineligible. — A 
note  executed  by  one  bank  and  discounted  by  another,  the  proceeds  of 
which  were  used  to  replace  funds  withdrawn  by  customers  to  purchase 
liberty  bonds  is  not  eligible  for  rediscount  by  a  Federal  Reserve  bank, 
since  the  proceeds  were  not  used  for  an  agricultural,  industrial  or 
commercial  purpose  or  for  the  purchase  of  notes  or  bonds  of  the 
United  States. 

Paper  secured  by  War  Savings  Stamps. — Notes,  drafts  and  bills  of 
exchange  which  are  secured  by  War  Savings  Stamps  are  ineligible  for 
rediscount  with  a  Federal  Reserve  bank.  It  is  suggested  bv  counsel 
that  War  Savings  Stamps  are  not  bonds  or  notes  of  the  Unites  States, 
but  in  effect  only  receipts  for  payment  on  account  of  non-negotiable 
evidences  of  indebtedness. 


Commercial  Banking  and  Credits  285 

Notes  of  finance  companies. — The  note  of  a  finance  or  credit  com- 
pany which  is  either  drawn  directly  or  indirectly  to  finance  some 
industrial  or  commercial  concern  in  the  transaction  of  its  business  is 
not  eligible  for  rediscount,  even  though  it  may  be  secured  by  paper 
which  is  itself  eligible  for  rediscount. 

Notes  of  acceptance  houses  or  brokers. — The  note  of  an  acceptance 
house  or  broker,  secured  by  acceptances  eligible  for  rediscount  at  a 
Federal  Reserve  bank,  is  not  eligible  for  rediscount.  Such  note  of 
the  acceptance  house  or  broker  cannot  be  said  to  have  been  used  for 
an  industrial,  agricultural  or  commercial  purpose,  since  the  business 
of  such  acceptance  house  or  broker  is  not  such  as  to  come  within  any 
of  these  classifications.  The  fact  that  the  note  is  secured  by  eligible 
paper  is  immaterial  if  the  proceeds  are  not  used  for  one  of  the  purposes 
named. 

Collateral  trust  notes  undesirable. — Collateral  trust  notes  are  con- 
sidered by  the  Board  as  not  arising  out  of  commercial  transactions, 
and  Federal  Reserve  banks  are,  therefore,  directed  not  to  accept  such 
for  rediscount. 

Collateral  of  bills  receivable. — The  note  of  a  manufacturer,  secured 
by  his  bills  receivable,  is  desirable  paper,  and  should  not  be  debarred 
as  a  collateral  trust  note.  However,  if  such  collateral  of  bills  receiv- 
able is  issued  for  the  purpose  of  carrying  collateral  for  a  speculative 
purpose  or  collateral  in  the  nature  of  stocks  and  bonds  other  than  the 
securities  of  the  United  States,  the  note  would  be  ineHgil)le  for  redis- 
count. 

Bills  Payable  With  Collection  Charges 

Exchange  and  collection  charges  distinguished. — A  hill  made  pay- 
able with  collection  charges  is  not  a  negotiable  instrument,  though 
the  negotiable  instruments  law  provides  that  an  instrument  payable 
with  exchange  does  not  lose  its  negotiability.  Exchange  is  usually 
ascertainable  in  advance  while  collection  charges  are  not  so  ascer- 
tainable. 

Charges  before  and  after  maturity. — A  bill  containing  a  provision 
for  payment  of  the  cost  of  collection  and  attorney's  fees  if  it  is  dis- 


286  Bank  and  Trade  Acceptances 

honored  at  maturity  is  a  valid  negotiable  instrument.  It  must  be 
drawn  so  as  to  show  that  no  collection  charges  are  to  be  included 
unless  the  bill  is  dishonored  at  maturity. 

EVIDENCE  OF  ELIGIBILITY 

AND 

REQUIREMENT  OF  STATEMENTS 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Evidence  of  eligibility. — A  Federal  Reserve  bank  must  be  satisfied 
by  reference  to  the  note  or  otherwise  that  it  is  eligible  for  rediscount. 
Compliance  of  a  note  may  be  evidenced  by  a  statement  of  the  borrower 
showing  a  reasonable  excess  of  quick  assets  over  current  liabilities. 
The  member  bank  shall  certify  in  its  application  whether  the  note 
oflfered  for  rediscount  has  been  discounted  for  a  depositor  or  for 
another  member  bank,  or  whether  it  has  been  purchased  for  a  non- 
depositor.  It  must  also  certify  whether  a  financial  statement  of  the 
borrower  is  on  file. 

Financial  statements. — Such  financial  statements  must  be  on  file 
with  respect  to  all  notes  oflFered  for  rediscount,  which  have  been  pur- 
chased from  sources  other  than  a  depositor  or  a  member  bank.  With 
respect  to  any  other  note  offered  for  rediscount,  if  no  statement  is  on 
file,  a  Federal  Reserve  bank  can  use  its  discretion  in  taking  the  steps 
necessary  to  satisfy  itself  as  to  eligibility.  It  is  authorized  also  to 
waive  the  requirement  of  a  statement  with  respect  to  any  note  dis- 
counted by  a  member  bank  for  a  depositor  or  another  member  bank, 
in  accordance  with  the  following: 

(i)  If  it  is  secured  by  a  warehouse,  terminal  or  other  similar  receipt 
covering  goods  in  storage ; 

(2)  If  the  aggregate  of  obligations  of  the  borrower  rediscounted 
and  offered  for  rediscount  at  the  Federal  Reserve  bank  is  less  than  a 
sum  equal  to  ten  per  cent,  of  the  paid  in  capital  of  the  member  bank 
and  does  not  exceed  Five  Thousand  Dollars. 


Commercial  Banking  and  Credits  287 

OPINIONS  AND  RULINGS 

Relating  to  Evidence  of  Eligibility  and  Requirement  of 

Statements 

Paper  of  cotton  mills. — Authorization  is  given  to  banks  to  discount 
paper  of  cotton  mills  indorsed  by  member  banks  where  general  condi' 
tions  are  satisfactory,  and  where  the  statement  of  the  cotton  mill  indi- 
cates that  the  plant  is  not  mortgaged  and  that  the  deficiency  between 
capital  and  plant  account  does  not  amount  to  more  than  five  dollars 
per  spindle. 

Unmined  minerals  are  not  regarded  as  quick  assets ;  standing  timber 
not  regarded  as  quick  assets. — The  Federal  Reserve  Board  regards 
it  as  an  unsafe  policy  for  Federal  Reserve  banks  to  treat  timber  stand- 
ing upon  tracts  of  land  as  quick  assets,  similar  to  manufactured  goods 
in  the  hands  of  the  manufacturer  or  jobber.  The  same  applies  to 
unmined  minerals. 

MATURITY  OF  NOTES  ELIGIBLE  FOR  REDISCOUNT 

General  Statutory  Provisions 

Commercial,  agricultural  and  live  stock  paper. — Notes,  drafts,  and 
bills  admitted  to  discount  under  terms  of  this  paragraph  must  have 
a  maturity  at  the  time  of  discount  of  not  more  than  ninety  days,  exclu- 
sive of  days  of  grace,  with  the  exception  of  notes,  drafts  and  bills 
drawn  or  issued  for  agricultural  purposes  or  based  on  live  stock, 
which  may  have  a  maturity  of  not  exceeding  six  months,  exclusive  of 
days  of  grace.  These  may  be  discounted  in  an  amount  to  be  limited 
to  a  percentage  of  the  assets  of  the  Federal  Reserve  bank  to  be  ascer- 
tained and  fixed  by  the  Federal  Reserve  Board. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Maturity  of  Promis.sory  Notes  Eligible  for  Rediscount 

Notes  payable  on  or  before  a  certain  date. — A  bill  payable  "on  or 
before"  a  certain  date  is  negotiable  j)aper,  and,  if  otherwise  in  con- 
formity with  the  provisions  of  law  and  the  Federal  Reserve  bank  is 
eligible  for  discount  with  a  Federal  Reserve  bank. 


288  Bank  and  Trade  Acceptances 

Demand  notes  not  eligible. — A  demand  note  or  bill  is  not  eligible 
since  it  is  not  in  terms  payable  within  the  prescribed  ninety  days,  but 
may,  at  the  option  of  the  holder,  not  be  presented  for  payment  until 
after  that  time.    However,  if  the  bill  were  altered  so  as  to  read  "on  or 

before  days  from  date,  pay  to  the  order  of  ourselves,"  etc.,  it 

would  come  within  the  terms  of  the  law  and  would  thus  he  made 
eligible  for  rediscount. 

Notes  payable  before  a  certain  date. — A  note  made  payable  "on 

demand,  and  if  no  demand  is  made,  then  on  ,"  is  eligible  for 

rediscount  with  a  Federal  Reserve  bank,  provided  that  the  date  to  be 
filled  in  is  not  more  than  ninety  days  from  the  date  of  discount,  and 
provided  further  it  conforms  to  the  other  provisions  of  law  and  the 
regulations  of  the  Board. 

Extension  of  time  on  notes  or  drafts. — A  note  or  draft  containing 
a  provision  for  an  extension  of  time  should  not  be  approved  for  general 
use  by  the  Federal  Reserve  Board. 

Direct  loans  and  discounts  distinguished. — A  member  bank  may 
obtain  indirectly,  acting  through  another  member  bank,  the  discount 
of  its  paper  secured  by  government  bonds  for  a  period  as  long  as 
ninety  days,  although  a  member  bank  acting  alone  may  not  tender  its 
collateral  to  the  Federal  Reserve  bank,  which  runs  for  more  than 
fifteen  days.  It  may  be  proper  in  this  connection  to  consider  questions 
of  fact — whether  the  two  banks  exchange  courtesies  merely  for  the 
purpose  of  having  their  notes  discounted  for  ninety  days  instead  of 
fifteen  days ;  but  in  case  a  country  bank  which  has  its  regular  dealings 
with  a  large  bank  in  a  city  sends  its  notes  secured  by  government 
bonds  to  that  bank,  the  Board  would  regard  the  note  as  eligible  for 
rediscount  by  the  city  bank. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Relating  to  Maturity  of  Promissory  Notes  Eligible  for  Rediscount 

Maturity  of  notes,  drafts,  bills  of  exchange  and  agricultural  paper. — 
Any  Federal  Reserve  bank  may  discount  for  any  of  its  member  banks 
any  note,  draft,  or  bill  of  exchange,  provided  it  has  a  maturity  at  the 


Commercial  Banking  and  Credits  289 

time  of  discount  of  not  more  than  ninety  days,  exclusive  of  days  of 
grace ;  but  if  drawn  or  issued  for  agricultural  purposes  or  based  on 
live  stock,  it  may  have  a  maturity  at  the  time  of  discount  of  not  more 
than  six  months,  exclusive  of  days  of  grace. 

AMOUNT  OF  PAPER  OF  ONE  INTEREST  REDISCOUNTABLE 

FOR  ONE  MEMBER  BANK 

General  Statutory  Provisions 

Limitation  of  amount;  exception. — The  aggregate  of  such  notes, 
drafts  and  bills  of  exchange,  bearing  the  signature  or  indorsement  of 
any  one  borrower,  whether  a  person,  company,  firm,  or  corporation, 
rediscount  for  any  one  bank,  shall  at  not  time  exceed  ten  percentum 
of  the  unimpaired  capital  and  surplus  of  said  bank ;  but  this  restric- 
tion shall  not  apply  to  the  discount  of  bills  of  exchange  drawn  in  good 
faith  against  actually  existing  values. 

Limitation  of  rediscounts  for  member  State  banks. — No  Federal 
Reserve  bank  shall  be  permitted  to  discount  for  any  member  State 
bank  or  trust  company,  notes,  drafts,  or  bills  of  exchange  of  any  one 
borrower  who  is  liable  for  borrowed  money  to  such  State  bank  or  trust 
company  in  an  amount  greater  than  ten  percentum  of  the  capital  and 
surplus  of  such  State  bank  or  trust  company ;  but  the  discount  of 
bills  of  exchange  drawn  against  actually  existing  value  and  the  dis- 
count of  commercial  or  business  paper  actually  owned  by  the  person 
negotiating  the  same  shall  not  be  considered  as  borrowed  money. 

Conditions  governing  discount  of  notes,  drafts  and  bills  of  exchange 
for  State  banks  or  trust  companies. — The  Federal  Reserve  hank,  as  a 
condition  of  the  discount  of  notes,  drafts  or  bills  of  exchange  for  such 
State  bank  or  trust  company  shall  require  a  certificate  or  guaranty  to 
the  effect  that  the  borrower  is  not  liable  to  such  bank  in  excess  of  ten 
percentum  of  the  unimpaired  capital  and  surplus  of  said  i)ank.  and  will 
not  be  permitted  to  become  liable  in  excess  of  this  amount  while  such 
notes,  drafts,  or  bills  of  exchange  are  under  discount  with  tht-  I-'cclcral 
Reserve  bank. 


290  Bank  and  Trade  Acceptances 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

In  Connection  With  Amount  of  Paper  of  One  Interest  Rediscount- 
able  FOR  One  Member  Bank 

Ten  per  cent,  limit  and  exceptions. — The  aggregate  of  notes,  drafts 
and  bills  bearing  the  signature  or  indorsement  of  any  one  borrower, 
whether  a  person,  company,  firm,  or  corporation,  rediscountable  for 
any  one  member  bank,  is  not  permitted  at  any  time  to  exceed  ten  per 
cent,  of  the  unimpaired  capital  and  surplus  of  such  bank;  but  this 
restriction  does  not  apply  to  the  discount  of  bills  of  exchange  in  good 
faith  against  actually  existing  value. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

In  Connection  With  Amount  of  Paper  of  One  Interest  Rediscount- 
able  for  One  Member  Bank 

Limitation  of  amount  rediscountable. — A  Federal  Reserve  bank  is 
not  permitted  to  rediscount  the  paper  of  a  customer  of  a  member  State 
bank  if  the  customer  is  indebted  to  such  member  bank  in  an  amount 
in  excess  of  ten  per  cent,  of  the  capital  and  surplus  of  said  bank. 

Discount  of  paper  for  one  maker  or  indorser. — If  any  particular 
paper  presented  by  a  member  bank  to  a  Federal  Reserve  bank  for 
rediscount,  singly  or  added  to  the  paper  of  the  same  makers  or  indors- 
ers,  which  the  Federal  Reserve  bank  has  already  rediscounted  for  said 
member  bank,  amounts  to  a  total  of  more  than  ten  per  cent,  of  the 
unimpaired  capital  and  surplus  of  that  bank,  the  Federal  Reserve  bank 
has  no  authority  for  such  rediscount. 

Not  applicable  to  rediscoimting  bank. — The  limitations  on  the  redis- 
count of  paper  bearing  the  signature  or  indorsement  of  any  one  bor- 
rower should  not  be  held  to  refer  to  the  indorsement  of  a  non-member 
bank  on  paper  rediscounted  with  a  member  bank. 

Paper  of  cotton  broker. — An  opinion  has  been  asked  as  to  whether  a 
cotton  broker  who  was  a  depositor  of  a  bank  and  financed  cotton  for 


Commercial  Banking  and  Credits  291 

various  mills  by  giving-  to  the  bank  his  note  secured  by  warehouse 
receipts  of  the  mills,  indorsed  in  blank,  for  cotton  stored  in  his  name 
and  properly  insured,  but  sold  to  the  mill  for  a  specific  amount  to  be 
paid  at  a  specific  time  as  per  sales  note  attached — whether  such  loans 
taken  from  one  broker  in  excess  of  ten  per  cent,  of  the  capital  and 
surplus  of  the  bank  would  be  an  excess  loan  under  the  Federal  Reserve 
Act,  if  the  financing  for  each  individual  mill  of  the  accepted  sales  note 
held  of  said  mill  were  not  in  excess  of  ten  per  cent.  It  is  held  that  the 
transaction  in  form  is  not  merely  a  discount  of  single  name  negotiable 
paper  secured  by  the  cotton.  Such  notes  would  clearly  come 
within  the  provisions  of  Section  5200  of  the  Revised  Statutes  (For  Sec- 
tion 5200,  see  "Investment  in  Acceptances  by  Member  Banks"  in 
Part  I,  "Bank  Acceptances").  No  Federal  Reserve  bank  could  redis- 
count such  notes  bearing  the  name  of  one  broker  for  an  aggregate 
amount  in  excess  of  ten  per  cent,  of  the  capital  and  surplus  of  the 
member  bank. 

Limitation  of  Amount  of  Commercial  or  Business  Paper  Redis- 

COUNTABLE  AND  ItS  RELATION  TO  SECTION  5200  OF 

THE  Revised  Statutes 

Commercial  or  business  paper. — While  a  member  bank  may  acquire 
commercial  or  business  paper  from  the  same  person  in  excess  of  ten 
per  cent,  of  its  unimpaired  capital  and  surplus,  its  Federal  Reserve 
bank  cannot  rediscount  such  paper  bearing  the  signature  or  indorse- 
ment of  the  same  person  in  excess  of  that  amount.  It  should  be  noted 
that  Section  13  of  the  Federal  Reserve  Act  does  not  amend  Section 
5200  of  the  U.  S.  Revised  Statutes.  (For  text  of  U.  S.  Revised  Statutes, 
Section  5200,  see  "Investment  in  Acceptances  by  Member  Banks,"  in 
Part  I,  on  "Bank  Acceptances"). 

Rediscounted  paper  not  included  in  aggregate  amount. — A  note  or 
bill  rediscounted  in  good  faith  by  a  member  bank  which  is  no  longer 
owned  or  held  by  the  bank  need  not  be  included  as  a  liability  of  the 
maker  to  the  bank.  Notes  or  bills  rediscounted  under  an  agreement  to 
repurchase,  or  which  are  merely  credited  to  the  account  of  the  bank 
oflFering  them  for  rediscount  are  subject  to  the  limitations  of  Section 
5200.  (For  text  of  U.  S.  Revised  Statutes,  Section  5200,  see  "Invest- 
ment in  Acceptances  by  Member  Banks"). 


292  Bank  and  Trade  Acceptances 

AGGREGATE  AMOUNT  REDISCOUNTABLE  FOR  ONE  BANK 

General  Statutory  Provisions 

Indebtedness  of  national  bank. — No  national  banking  association 
shall  at  any  time  be  indebted,  or  in  any  way  liable,  in  an  amount 
exceeding  the  amount  of  its  capital  stock  at  such  time  actually  paid 
in  and  remaining  undiminished  by  losses  or  otherwise,  except  on 
account  of  liabilities  incurred  under  the  provisions  of  the  Federal 
Reserve  Act. 

Rediscount  subject  to  regulations  of  Federal  Reserve  Board. — The 

discount  and  rediscount  and  the  purchase  and  sale  by  any  Federal 
Reserve  bank  of  any  bills  receivable  and  of  domestic  and  foreign  bills 
of  exchange  and  of  acceptances  are  subject  to  such  restrictions,  limita- 
tions, and  regulations  as  may  be  imposed  by  the  Federal  Reserve 
Board. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Aggregate  Amount  of  Promissory  Notes  Rediscount- 
able  FOR  One  Bank 

No  limitation  by  law  of  commercial  paper  rediscoimtable. — The  law 

places  no  limitation  upon  the  amount  of  commercial  paper  which  a 
member  bank  may  rediscount  with  a  Federal  Reserve  bank,  but  leaves 
this  to  the  judgment  of  the  officers  of  the  Federal  Reserve  bank. 

Discretion  of  Federal  Reserve  bank. — A  national  bank  may  not  bor- 
row as  bills  payable  in  excess  of  its  capital  stock,  according  to  Section 
5202  of  the  Revised  Statutes,  but  under  the  Federal  Reserve  Act,  it 
may  rediscount  actual  items  of  paper  in  its  possession  to  any  amount 
in  the  discretion  of  the  Federal  Reserve  bank  in  its  district. 

INDORSEMENT  OF  MEMBER  BANKS 

In  Connection  With  Rediscount  of  Promissory  Notes 

General  Statutory  Provisions 

Indorsement. — Any  Federal  Reserve  bank  may  discount  notes, 
drafts,  and  bills  of  exchange  upon  the  indorsement  of  any  of  its  mem- 


Commercial  Banking  and  Credits  293 

ber  banks,  which  shall  be  deemed  a  waiver  of  demand,  notice  and  pro- 
test by  such  bank  as  to  its  own  indorsement  exclusively. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

In  Connection  With  Indorsement  of  Member  Banks 

Indorsement  as  waiver. — A  simple  written  indorsement  will  be 
regarded  as  satisfactory  and  as  coming  within  the  terms  of  the  law. 

Effect  of  not  bearing  "without  recourse." — If  a  note  is  otherwise 
eligible  for  rediscount,  the  fact  that  it  bears  a  "without  recourse" 
indorsement  of  a  non-member  bank  will  not  aflfect  its  eligibility. 

REDISCOUNT  FOR  NON-MEMBER  BANK 

In  Connection  With  Promissory  Notes 

General  Statutory  Provisions 

Rediscounts  for  non-members. — No  member  bank  shall  act  as  the 
medium  or  agent  of  a  non-member  bank  in  applying  for  or  receiving 
discounts  from  a  Federal  Reserve  bank  except  by  permission  of  the 
Federal  Reserve  Board. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Rediscount  of  Promissory  Notes  for  Non-Member 

Banks 

Rediscount  of  paper  acquired  from  non-member  banks. — It  would 
be  necessary  in  each  case  for  the  officers  of  the  Federal  Reserve  bank 
to  determine  whether  or  not  the  proceeds  of  such  discounts  are  to  be 
used  for  the  purpose  of  making  a  loan  to  a  non-member  bank.  If  the 
money  thus  borrowed  is  to  be  relent  to  a  non-member  bank,  redis- 
count should  not  be  accepted  without  the  permission  of  the  Federal 
Reserve  Board.  If,  on  the  other  hand,  a  member  bank  had  in  good 
faith  acquired  from  a  non-member  bank  by  rediscount,  notes  which  arc 


294  Bank  and  Trade  Acceptances 

eligrible  under  the  regulations  of  the  Board  for  rediscount  with  a  Fed- 
eral Reserve  bank,  and  such  notes  were  held  as  part  of  the  assets  of 
the  member  bank,  there  would  seem  to  be  no  objection  to  the  Federal 
Reserve  bank  accepting  such  rediscounts,  provided  the  officers  are 
satisfied  that  the  member  bank  did  not  extend  accommodation  to  the 
non-member  bank  with  a  view  of  rediscounting  notes  so  acquired  with 
the  Federal  Reserve  bank.  This  is  one  of  the  cases  which  must  be 
left  very  largely  to  the  judgment  and  discretion  of  the  officers  of  the 
Federal  Reserve  bank,  and  the  determination  must  be  reached  by 
them  on  the  facts  of  the  case. 

Rediscount  of  paper  indorsed  by  non-member  bank. — The  limita- 
tions on  the  rediscount  of  paper  bearing  the  signature  or  indorsement  of 
any  one  borrower  should  not  be  held  to  refer  to  the  indorsement  of 
a  non-member  bank  on  paper  rediscounted  with  a  member  bank. 
It  is  true  that  in  such  case  the  non-member  bank  is  contingently  liable 
if  the  paper  is  not  paid  at  maturity,  but  the  Board  is  inclined  to  the 
view  that  this  language  refers  to  paper  bearing  the  signature  or 
indorsement  of  borrowers  or  customers  of  the  member  banks  and 
not  to  the  indorsement  of  other  banks.  A  non-member  bank  could 
not,  of  course,  obtain  indirect  accommodations  from  the  Federal 
Reserve  bank  through  the  medium  or  agency  of  a  member  bank 
except  with  the  permission  of  the  Federal  Reserve  Board.  But,  if 
a  member  bank  had  acquired  eligible  paper  in  due  course  by  redis- 
count from  a  non-member  bank,  the  member  bank  should  hardly  be 
precluded  from  rediscounting  this  paper  with  the  Federal  Reserve 
bank  because  it  bears  the  indorsement  of  the  non-member  bank. 

REDISCOUNT  OF  DRAFTS  AND  TRADE  ACCEPTANCES 

Regulations  of  Federal  Reserve  Board 

Definition  of  draft  or  bill  of  exchange. — A  draft  or  bill  of  exchange 
is  an  unconditional  order  in  writing,  addressed  by  one  person  to 
another,  other  than  a  banker,  signed  by  the  person  giving  it,  requiring 
the  person  to  whom  it  is  addressed  to  pay,  in  the  United  States,  at  a 
fixed  or  determinable  future  time,  a  sum  certain  in  dollars  to  the 
order  of  a  specified  person. 


Commercial  Banking  and  Credits  295 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  the  Rediscount  of  Drafts  and  Trade  Acceptances 

Extension  of  time  for  notes  or  drafts. — A  note  or  draft  containing 
a  provision  for  an  extension  of  time  should  not  be  approved  for  general 
use  by  the  Federal  Reserve  Board. 

Presentment  of  bills  for  acceptance. — The  drawer  and  indorser  of  a 
bill  of  exchange  made  payable  on  the  date  specified  in  the  bill  are  not 
discharged  by  a  failure  to  present  for  acceptance,  unless  the  bill 
expressly  provides  that  it  must  be  presented  for  that  purpose,  or 
unless  it  is  payable  elsewhere  than  at  the  residence  or  place  of  business 
of  the  drawee. 

Acceptor  not  affected  by  waiver. — The  acceptor  of  a  bill  of  exchange 
is  the  principal  debtor.  The  law  requires  that  notice  of  demand  and 
protest  be  given  to  parties  secondarily  liable  in  case  of  dishonor.  This 
right  to  receive  notice  is  a  personal  one  which  may  be  waived  by  the 
parties  entitled  thereto,  that  is,  the  drawer  and  indorser;  but  such 
waiver  has  no  affect  on  the  acceptor  or  principal  debtor. 

NEGOTIABILITY  OF  DRAFTS  AND  TRADE  ACCEPTANCES 

Effect  of  waivers. — The  negotiability  of  a  bill  of  exchange  is  not 
affected  by  provisions  which  waive  demand,  notice  and  protest ;  which 
waive  homestead  exemption  rights ;  and  which  provide  for  the  costs 
of  collection  and  attorney's  fees. 

Drafts  payable  on  condition. — A  draft  made  "payable  on  arrival  of 
car"  is  non-negotiable,  not  being  payable  at  a  determinable  future 
time. 

Drafts   payable   with   interest. — A    provision    in   a   draft  or  bill   of 

exchange  that  it  is  j>ayable  "with  interest  at  the  rate  of %  per 

annum   after   maturity,   if  payment   is  delayed,"   does  not  affect   the 
negotiability  of  an  instrument. 

Charges  before  and  after  maturity. — A  bill  drawn  for  a  fixed  sum 
"with  collection  charges"  is  not  a  negotiable  instrument  unless  it  is 


296  Bank  and  Trade  Acceptances 

so  drawn  as  to  show  that  no  collection  charges  are  to  be  included 
unless  the  bill  is  dishonored  at  maturity.  A  bill  containing  a  provision 
for  payment  of  the  costs  of  collection  of  attorney's  fees  if  it  is  dis- 
honored at  maturity  is  a  valid  negotiable  instrument. 

Exchange  and  collection  charges. — A  bill  made  payable  with  "col- 
lection charges"  is  not  a  negotiable  instrument,  though  the  negotiable 
instruments  law  provides  that  an  instrument  payable  "with  exchange" 
does  not  lose  its  negotiability.  It  is  suggested  by  counsel  that  the 
amount  of  exchange  is  usually  ascertainable  in  advance  while  col- 
lection charges  are  not  so  ascertainable. 

Drafts  payable  to  order  of  drawee. — A  bill  made  payable  to  the 
order  of  the  drawee  is  not  negotiable  until  the  drawee  as  payee  has 
indorsed  it.  When  it  has  been  accepted  and  indorsed  by  the  payee  it 
is  a  valid  negotiable  instrument  in  the  hands  of  a  third  party,  and  the 
drawer  is  not  released,  since  the  terms  of  his  order  have  been  specifi- 
cally complied  with. 


SECTION  V 

TRADE  ACCEPTANCES 

Regulations  of  the  Feder.\l  Reserve  Board 

Definition. — A  trade  acceptance  is  defined  in  simple  terms  as  a  draft 
or  bill  of  exchange  drawn  by  the  seller  on  the  purchaser  of  goods  sold, 
and  accepted  by  such  purchaser. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Trade  Acceptances 

Acceptance  by  drawee. — A  draft  to  be  eligible  as  a  trade  acceptance 
must  be  accepted  by  the  drawee  and  not  by  anyone  else. 

Place  of  payment  of  acceptance. — An  acceptance  to  pay  at  a  particu- 
lar place  different  from  the  residence  of  the  acceptor  is  a  general 
acceptance,  unless  it  expressly  states  that  the  bill  is  to  be  paid  there 
and  not  elsewhere,  and  does  not  render  the  bill  non-negotiable. 

Discount  for  prepayment. — A  trade  acceptance  providing  for  a  fixed 
discount  if  paid  at  a  certain  time  before  maturity  should  not  be 
approved  for  general  use  by  the  Federal  Reserve  Board. 

Discount  for  payment  at  maturity. — A  trade  acceptance  which  con- 
sists of  an  order  to  pay  a  certain  amount  which  is  the  amount  of  the 
debt,  minus  a  discount  for  prompt  payment  at  maturity,  or  if  not  paid 
at  maturity  to  pay  a  greater  amount,  which  is  the  amount  of  the  dclit 
without  any  discount,  is  an  order  to  pay  a  certain  sum  and  is  nego- 
tiable. 

ELIGIBLE  DRAFTS  AND  TRADE  ACCEPTANCES 
General  Statutory  Provisions 

Definition  of  eligible  paper. — Eligible  paper  is  defined  in  the  law 
as  follows:     Notes,  drafts  and  bills  of  exchange  issued  or  drawn  for 

297 


298  Bank  and  Trade  Acceptances 

agricultural,  industrial  or  commercial  purposes,  or  the  proceeds  of 
which  have  been  used  or  are  to  be  used  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  right  to  determine  or  define  the  character 
of  the  paper  thus  eligible  for  discount.  Notes,  drafts  and  bills  of 
exchange,  secured  by  staple  agricultural  products,  or  other  goods, 
wares  or  merchandise,  are  eligible,  as  well  as  are  notes,  drafts  or  bills 
drawn  for  the  purpose  of  carrying  on  trading  in  bonds  or  notes  of  the 
Government  of  the  United  States. 

REGULATIONS  OF  FEDERAL  RESERVE  BOARD 

Relating  to  Eligible  Drafts  and  Trade  Acceptances 

Conditions  governing  eligibility. — ^The  Federal  Reserve  Board  has 
determined  that  in  order  for  a  note,  draft,  or  bill  of  exchange  to  be 
eligible  for  rediscount,  the  proceeds  must  have  been  used  or  are  to  be 
used  in  producing,  purchasing,  carrying  or  marketing  goods,  wares 
and  merchandise  in  one  or  more  of  the  steps  of  the  process  of  manu- 
facturing, producing  or  distributing. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Eligible  Drafts  and  Trade  Acceptances 

Bills  based  on  retail  transactions. — A  bill  of  exchange  drawn  by  the 
seller  of  goods  and  accepted  by  the  purchaser  of  those  goods  is  a  trade 
acceptance,  according  to  the  informal  ruling  of  the  Federal  Reserve 
Board,  regardless  of  whether  or  not  the  purchaser  intends  to  resell 
the  goods  or  to  use  them  for  his  own  purpose.  It  is,  therefore,  made 
possible  for  a  retail  dealer  to  finance  the  sale  of  his  goods  to  a  retail 
customer  by  means  of  the  trade  acceptance. 

Bills  based  on  sale  and  delivery  of  gas. — An  acceptance  drawn  by  a 
gas  producing  company  or  a  gas  distributing  company  and  accepted 
by  the  latter  in  payment  for  gas  sold  and  delivered  is  a  trade  accept- 
ance eligible  for  rediscount  by  a  Federal  Reserve  bank. 

Bills  based  on  installment  plan  sales. — The  Board  has  ruled  that  if 
the  purchaser  is  willing  to  accept  a  draft  in  advance  of  the  delivery  of 


Commercial  Banking  and  Credits  299 

the  goods,  there  will  seem  to  be  no  reason  why  such  an  acceptance 
should  not  be  treated  on  the  same  basis  as  a  bill  drawn  and  accepted 
after  delivery  of  such  goods.  The  above  has  been  ruled  in  connection 
with  the  sale  of  coffee  mills,  etc.,  on  the  installment  plan. 

Drafts  based  on  electrical  installation. — Drafts  drawn  for  the  pur- 
chase price  of  electrical  goods  which  include  the  cost  of  installation, 
may  be  treated  as  trade  acceptances  when  such  drafts  are  accepted  by 
the  purchaser. 

Acceptances  in  liquidation  of  open  account. — A  bill  drawn  by  a 
retail  dealer  on  his  retail  customer  to  finance  the  sale  of  goods  to  that 
customer  is  a  trade  acceptance  even  if  it  is  drawn  after  the  purchaser 
has  failed  to  remit  promptly  on  an  open  account.  The  Board  has 
expressed  its  opinion  several  times  that  the  attempt  to  use  a  trade 
acceptance  in  this  manner  as  a  means  of  liquidating  an  otherwise 
slow  account  would  involve  considerable  danger  to  the  primary  pur- 
poses of  the  trade  acceptance  movement  and  would  subordinate  the 
trade  acceptance  to  the  open  account  method,  by  suggesting  it  as  a  last 
resort  for  bad  accounts.  Trade  acceptances  of  this  character  should 
probably  be  considered  eligible  as  a  matter  of  law.  Nevertheless,  mem- 
ber banks  and  Federal  Reserve  banks  may  discriminate  against  them, 
and  should  be  encouraged  to  do  so  as  far  as  possible. 

Acceptances  of  sales  corporations. — A  draft  drawn  by  a  lumber  cor- 
poration upon  a  sales  corporation,  which  it  and  a  number  of  other 
concerns  have  organized,  will,  when  accepted,  become  a  trade  accept- 
ance, even  though  the  selling  corporation  is  a  stockholder  of  the  sales 
corporation,  provided  the  latter  is  organized  in  good  faith,  and  not 
merely  to  act  as  agent  for  the  purpose  of  evading  the  law. 

Acceptances  based  on  advertising  space. — A  draft  or  bill  of  exchange 
drawn  by  the  seller  on  the  purchaser  of  advertising  space  and  accepted 
by  such  purchaser,  is  a  trade  acceptance.  A  draft  or  bill  of  exchange 
drawn  by  a  publisher  or  other  advertising  agency  on  the  purchaser  of 
advertising  space,  and  accepted  by  such  i)urchaser,  shall  be  considered 
a  trade  acceptance,  provided  the  advertisement  on  wliicli  the  draft  or 
bill  is  based,  is  for  the  purpose  of  promoting  or  facilitating  the  pro- 
duction,  manufacture,   distribution,   or   sale   of  goods,   whether   iner- 


300  Bank  and  Trade  Acceptances 

chandise  or  agricultural  products,  including-  live  stock,  and  provided, 
further,  that  such  advertisement  is  not  illegal  and  is  not  for  the  pur- 
pose of  promoting  or  facilitating  any  transaction  which  is  prohibited 
by  the  laws  of  the  State  in  which  it  is  to  be  consummated.  These  are 
the  conditions  upon  which  drafts  drawn  against  advertising  space  sold 
will  be  ruled  trade  acceptances. 

Acceptances  based  on  foreign  transactions ;  imports. — ^Trade  accept- 
ances originating  through  importations  from  foreign  countries,  which 
are  indorsed  by  banks  or  bankers  may  be  considered  as  trade  accept- 
ances, and  may  be  taken  within  the  range  of  the  discount  rates  for 
bankers'  acceptances. 

Acceptances  based  on  foreign  transactions;  exports, — Bills  drawn 
for  the  purpose  of  providing  funds  for  the  purchase  and  export  of  cross 
ties  and  lumber  are  eligible  for  rediscount  if  properly  indorsed  and 
otherwise  conforming  to  the  regulation  of  the  Federal  Reserve  Board. 
The  above  has  been  ruled  in  connection  with  exports  to  Cuba. 

INELIGIBLE  DRAFTS  AND  TRADE  ACCEPTANCES 

Gener;\l  Statutory  Provisioxs 

Security  paper  ineligible. — Notes,  drafts  or  bills  covering  merely 
investments  or  issued  or  drawn  for  the  purpose  of  carrying  on  trading 
in  stocks,  bonds  or  other  investment  securities,  except  bonds  or  notes 
of  the  United  States  Government  are  ineligible  for  rediscount. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Relating  to  Ineligible  Drafts  and  Trade  Acceptances 

Notes  for  permanent,  fixed  or  speculative  investments, — The  paper 
must  not  be  a  note,  draft  or  bill  of  exchange,  the  proceeds  of  which 
have  been  used  or  are  to  be  used  for  permanent  or  fixed  investments 
of  any  kind,  such  as  land,  buildings  or  machinery.  The  paper  must 
not  be  a  note,  draft  or  bill  of  exchange,  the  proceeds  of  which  have 
been  used  or  are  to  be  used  for  investments  of  a  purely  speculative 
character. 


Commercial  Banking  and  Credits  301 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Ineligible  Drafts  and  Trade  Acceptances 

Acceptances  based  on  future  purchases. — A  bill,  in  order  to  be  a 
trade  acceptance,  must  arise  out  of  a  purchase  of  goods,  and  unless 
that  purchase  is  either  consummated  or  actually  contracted  for  at  the 
time  the  bill  is  drawn,  it  is  doubtful  whether  it  can  properly  be  said 
that  the  obligation  arises  out  of  a  purchase  of  goods. 

Drafts  in  payment  of  insurance  premiums. — A  draft  drawn  by  a 
casualty  company  against  the  policy  holder  for  premiums  could  hardly 
be  said  to  be  a  draft  by  the  seller  on  the  purchaser  of  goods  sold  and 
would  not  in  the  opinion  of  the  Board  come  within  the  Board's  present 
definition  of  a  trade  acceptance. 

Drafts  drawn  to  finance  capital  requirements  ineligible. — The  Board 
conceives  the  trade  acceptance  as  an  instrument  which  carries  upon 
its  face  the  evidence  of  the  commercial  character  of  the  transaction 
which  gave  it  birth.  The  finance  paper  of  the  corporation  issued 
against  drafts  drawn  by  it  on  dealers  and  placed  in  trust  to  secure 
such  paper  issued  by  it  in  the  shape  of  notes  or  certificates,  gives  no 
indication  whatever  as  to  the  nature  of  the  security,  which  may  or 
may  not  be  eligible  paper.  The  corporation  by  issuing  notes  of  this 
character  is  really  raising  money  for  capital  requirements  for  sim- 
ilar transactions  in  the  future,  and  the  whole  plan  is  in  essence  a 
finance  operation  rather  than  a  commercial  transaction. 

EVIDENCE  OF  ELIGIBILITY 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Character  of  evidence. — A  I-'ederal  Reserve  bank  may  take  such 
steps  as  it  deems  necessary  to  satisfy  itself  as  to  the  eligibility  of  the 
draft  or  bill  ofTered  for  rediscount,  unless  it  presents  prima  facie  evi- 
dence thereof,  or  bears  a  stamp  or  certificate  affixed  by  the  acceptor 
or  drawer  showing  that  it  is  a  trade  acceptance. 


302  Bank  and  Trade  Acceptances 

OPINIONS  AND  RULINGS 

Relating  to  Evidence  of  Eligibility 

Effect  of  stamp  "trade  acceptance." — It  has  been  held  several  times 
that  a  bill  stamped  a  "trade  acceptance"  by  a  land  company,  and 
signed  by  such  party  as  "acceptor"  does  not  in  itself  make  it  a  trade 
acceptance. 

MATURITY 
General  Statutory  Provisions 

Commercial,  agricultural  or  live  stock  paper. — Notes,  drafts  or  bills 
admitted  to  rediscount  must  have  a  maturity  at  the  time  of  not 
more  than  ninety  days,  exclusive  of  days  of  grace,  provided  that 
such  notes,  drafts  or  bills  drawn  or  issued  for  agricultural  purposes, 
or  based  on  live  stock,  and  having  a  maturity  not  exceeding  six 
months,  exclusive  of  days  of  grace,  may  be  discounted  in  an  amount 
limited  to  a  percentage  of  the  assets  of  the  Federal  Reserve  bank,  to 
be  ascertained  and  fixed  by  the  Federal  Reserve  Board. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Relating  to  Maturity 

Period  of  maturity;  requirements. — The  draft  or  trade  acceptance 
must  have  a  maturity  at  the  time  of  discount  of  not  more  than  ninety 
days,  exclusive  of  days  of  grace,  but  if  drawn  or  issued  for  agricultural 
purposes  or  based  on  live  stock,  it  may  have  a  maturity  at  the  time  of 
discount  of  not  more  than  six  months,  exclusive  of  days  of  grace. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Maturity 

Drafts  payable  on  condition. — A  draft  made  "payable  on  arrival  of 
car"  is  non-negotiable,  not  being  payable  at  a  determinable  future  time 
and  is,  therefore,  ineligible  for  rediscount  by  a  Federal  Reserve  bank. 


Commercial  Banking  and  Credits  303 

Drafts  payable  "on  or  before"  a  certain  date. — Drafts  payable 
"ninety  days  from  date  or  before  on  five  days  after  demand  (that  is,  on 
five  days'  notice)  by  the  holder  hereof"  are  negotiable  and  eligible  for 
discount  with  a  Federal  Reserve  bank. 

Demand  drafts. — A  demand  note  or  bill  is  not  eligible  since  it  is  not 
in  terms  payable  within  the  prescribed  ninety  days,  but.  at  the  option 
of  the  holder,  may  not  be  presented  for  payment  until  after  that  time. 

If  the  bill  were  altered  so  as  to  read  "on  or  before  days  from 

date  pay  to  the  order  of  ourselves,"  etc.,  it  would  come  within  the 
terms  of  the  law  and  would  be  eligible  for  rediscount. 

Extension  of  time. — A  note  or  draft  containing  a  provision  for  an 
extension  of  time  should  not  be  approved  for  general  use  by  the  Fed- 
eral Reserve  Board. 

AMOUNT  OF  PAPER  OF  ONE  INTEREST  REDISCOUNTABLE 

FOR  ONE  MEMBER  BANK 

General  Statutory  Provisions 

Limitation  as  to  amount  and  acceptance. — The  aggregate  of  such 
notes,  drafts  and  bills  bearing  the  signature  or  indorsement  of  any 
one  borrower,  whether  a  person,  company,  firm,  or  corporation,  redis- 
counted  for  any  one  bank,  shall  at  no  time  exceed  ten  percentum  of 
the  unimpaired  capital  and  surplus  of  said  bank ;  but  this  restriction 
shall  not  apply  to  the  rediscount  of  bills  of  exchange  drawn  in  good 
faith  against  actually  existing  items. 

REGULATIONS  OF  FEDERAL  RESERVE  BOARD 

On  the  Rediscount  of  Drafts  and  Trade  Acceptances 

Limitation  as  to  amount  and  exception. — The  aggrognte  of  notes, 
drafts  and  bills  bearing  the  signature  or  indorsement  of  any  one  bor- 
rower, whether  a  person,  company,  firm,  or  corporation,  rcdiscountcd 
for  any  one  member  bank,  shall  at  no  time  exceed  ten  per  cent,  of  the 
unimpaired  capital  and  surplus  of  such  bank:  but  this  restriction  shall 
not  apply  to  the  discount  of  bills  of  exchange  drawn  111  good  faith 
against  actually  existing  values. 


304  Bank  and  Trade  Acceptances 

OPINIONS  OF  COUNSEL  AND  RULINGS 

On  the  Rediscount  of  Drafts  and  Trade  Acceptances 

Drafts  discounted  before  acceptance.— A  bill  of  exchange  discounted 
before  acceptance  may  be  said  to  be  drawn  against  actually  existing 
values,  when  and  only  when  it  is  accompanied  by  shipping  documents, 
warehouse  receipts  or  other  papers  securing  title  to  the  goods  sold. 

Trade  acceptances. — An  accepted  bill  of  exchange,  unaccompanied 
by  shipping  documents  or  other  such  paper  may  be  considered  as 
drawn  against  actually  existing  values  if  drawn  against  the  drawee  at 
the  time  of,  or  within  a  reasonable  time  after,  the  shipment  or  deliv- 
ery of  the  goods  sold.  In  this  latter  case,  there  must  be  reasonable 
grounds  to  believe  that  the  goods  are  in  existence  in  the  hands  of  the 
drawee  either  in  their  original  form  or  in  the  shape  of  the  proceeds  of 
their  sale. 

Trade  acceptances  for  long  standing  open  accounts. — A  bill  drawn 
for  a  balance  due  on  open  accounts  of  long  standing,  which  is  accepted 
by  the  debtor,  might  constitute  a  trade  acceptance,  but  in  order  for  it 
to  be  excepted  from  the  limitations  imposed  by  the  Federal  Reserve 
Act  as  a  bill  of  exchange  drawn  against  actually  existing  values,  it 
must  have  been  drawn  contemporaneously  with  or  withm  such  a  rea- 
sonable time  after  the  shipment  of  the  goods,  as  to  justify  the  assump- 
tion that  the  goods  are  in  the  hands  of  the  drawee  in  their  original 
form  or  in  the  form  of  the  proceeds  of  sale. 

Qualified  acceptances. — A  bill  of  exchange  drawn  payable  "at 
sight"  and  accepted  payable  in  three  months  is  a  qualified  or  condi- 
tional acceptance,  and  the  maker  and  prior  indorsers  are  released.  The 
instrument  in  effect  becomes  the  promissory  note  of  the  acceptor  and 
would  not  come  within  the  exception  to  Section  5200  of  the  Revised 
Statutes,  as  a  "bill  of  exchange"  drawn  in  good  faith  against  actually 
existing  value. 

Evidence  of  actually  existing  value. — As  evidence  of  this  fact,  the 
Federal  Reserve  bank  might  reasonably  require  such  trade  accept- 
ances as  are  offered  "as  bills  of  exchange  drawn  against  actually  exist- 


Commercial  Banking  and  Credits 


305 


ing  values"  to  show  the  date  of  invoice  so  that  it  may  be  determined 
whether  or  not  the  account  is  one  of  long  standing.  (For  further 
reference  to  the  subject  of  rediscount  of  drafts  and  trade  acceptances, 
see  opinions  and  rulings  relative  to  promissory  notes ;  also  rediscount 
of  promissory  notes  affecting  the  aggregate  amount  rediscountable  for 
one  bank;  indorsement  of  member  banks;  and  rediscounts  for  non- 
member  banks). 


REDISCOUNTS  BY  FEDERAL  RESERVE  BANKS  OF  SIX 
MONTHS'  AGRICULTURAL  PAPER 

Regulations  of  the  Federal  Reserve  Board 

Six  months'  agricultural  paper  defined;    includes  live  stock. — Six 

months'  agricultural  paper  is  defined  as  a  note,  draft,  bill  of  exchange, 
or  trade  acceptance,  drawn  or  issued  for  agricultural  purposes,  or 
based  on  live  stock;  that  is,  a  note,  draft,  bill  of  exchange,  or  trade 
acceptance,  the  proceeds  of  which  have  been  used,  or  are  to  be  used, 
for  agricultural  purposes,  including  the  breeding,  raising,  fattening, 
or  marketing  of  live  stock,  and  which  has  a  maturity  at  the  time  of 
discount  of  not  more  than  six  months,  exclusive  of  days  of  grace. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  the  Rediscount  of  Six  Months'  Agricultural  Paper 

What  live  stock  includes. — The  term  "live  stock"  is  held  to  include 
not  only  beef  cattle,  but  also  horses  and  mules. 

Notes  of  cattle  dealers  merely  mercantile. — Notes  made  by  mule 
and  cattle  dealers  are  mercantile  rather  than  agricultural  paper. 

Notes  of  implement  dealers  not  agricultural  paper. — A  note  made 
by  a  dealer  in  agricultural  implements  is  not  agricultural  paper. 

Agricultural  products  or  implements. — The  purchase  or  sale  of  an 
agricultural  product,  or  of  implements  or  other  commodities  used  in 
agriculture,  constitutes  a  commercial  transaction.  A  note  made  by 
a  merchant,  the  proceeds  of  which  are  used  to  purchase  seed,  to  be 
later  retailed  or  sold,  cannot  be  treated  as  given  for  agricultural  pur- 
poses and  cannot  be  discounted  by  a  Federal  Reserve  bank,  if  it  has 
a  maturity  at  time  of  discount  of  more  than  ninety  days. 

Notes  or  bills  of  packing  companies. — The  bill  or  note  of  a  packing 
company,  the  proceeds  of  which  are  used  for  the  purchase  of  live 

306 


Commercial  Banking  and  Credits  307 

stock  which  is  slaughtered  upon  purchase,  is  not  "based  on  live 
stock"  and  is,  therefore,  not  eligible  for  rediscount  if  it  has  a  maturity 
in  excess  of  ninety  days. 

ELIGIBLE  AGRICULTURAL  PAPER 

General  Statutory  Provisions 

Agricultural  and  live  stock  paper. — Notes,  drafts  and  bills  drawn 
or  issued  for  agricultural  purposes,  or  based  on  live  stock,  and  having 
a  maturity  not  exceeding  six  months,  exclusive  of  days  of  grace,  may 
be  rediscounted  in  an  amount  to  be  limited  to  a  percentage  of  the  assets 
of  the  Federal  Reserve  bank,  to  be  ascertained  and  fixed  by  the  Fed- 
eral Reserve  Board. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 
Relating  to  Eligible  Agricultural  Paper 

Conditions  governing  eligibility. — To  be  eligible  for  rediscount, 
six  months'  agricultural  paper,  whether  a  note,  draft,  bill  of  exchange, 
or  trade  acceptance,  must  comply  with  the  statutory  provisions,  regu- 
lations of  the  Federal  Reserve  Board,  opinions  of  counsel  and  rulings 
reviewed  in  the  subject  of  "Classes  of  Promissory  Notes  I'^ligiblc  for 
Rediscount,"  which  are  the  same  in  the  case  of  the  rediscount  of 
drafts  and  trade  acceptances. 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Eligible  Agricultural  Paper 

Cattle  mortgages. — Mortgages  on  cattle  arc  not  re(|uircd,  and  tlir 
question  whether  paper  secured  by  cattle  is  sclf-lic|uidatiiig  is  a  legal 
one  to  be  determined  by  the  Federal  Reserve  Hank. 

Notes  for  fertilizer. — A  farmer's  six  months'  note  for  commercial 
fertilizer,  discounted  and  indorsed  by  a  member  bank,  is  agricultural 
paper  eligible  for  rediscount  with  the  h'cderal  Rrscrvc  bank. 

Notes  for  dairy  cattle. — Notes  signed  by  a  fanner,  the  proceeds  of 
which  are  used  for  the  purchase  of  cows  to  be  used  as  dairy  cattle, 


3o8  Bank  and  Trade  Acceptances 

are  eligible  for  rediscount  at  the  discretion  of  the  Federal  Reserve 
bank,  notwithstanding  the  fact  that  the  cattle  are  not  primarily  pur- 
chased for  "breeding,  raising,  fattening,  and  marketing  of  live  stock." 

Cattle  for  breeding,  grazing  or  fattening. — Loans  on  cattle,  which 
are  used  for  breeding,  grazing  or  fattening,  may  be  made  under  the 
classification  of  six  months'  agricultural  paper,  and  the  paper  may  be 
rediscounted  by  a  member  bank  at  its  Federal  Reserve  bank. 

Farmers'  notes. — Farmers'  notes,  the  proceeds  of  which  are  used 
for  tilling  farms,  or  for  draining  land  already  in  use  as  farm  land, 
should  be  classified  as  agricultural  paper,  and  are  eligible  for  redis- 
count. 

Notes  for  farm  tractors. — Notes  given  by  farmers  for  the  purchase 
price  of  tractors  where  the  tractors  are  used  to  supplement  the  work 
of  horses  or  mules,  or  are  used  altogether  instead  of  these  animals, 
should  be  admitted  to  discount  as  agricultural  paper  when  they  mature 
within  six  months. 

Agricultural  paper,  how  determined. — Agricultural  paper  need  not 
be  directly  secured  by  agricultural  products,  but  should  be  genuinely 
based  upon  transactions  entered  upon  for  agricultural  purposes.  In 
such  cases,  a  determination  as  to  whether  paper  may  be  classified  as 
agricultural  or  not  is  left  to  general  banking  prudence. 

Discount  by  maker  or  indorser. — Notes  given  for  the  purchase  price 
of  a  commodity  can  be  classed  as  agriculture  paper  eligible  for  redis- 
count if  they  have  a  maturity  exceeding  ninety  days  and  if  the  maker 
is  to  use  the  commodity  for  an  agricultural  purpose,  regardless  of 
whether  the  note  is  discounted  by  the  maker  or  by  the  indorser. 

Paper  payable  to  seller  of  commodity- — A  note  may  be  treated  as 
agricultural  paper,  whether  discounted  with  the  member  bank  by  the 
farmer  as  the  maker,  or  by  the  seller  as  the  indorser,  where  the  farmer 
makes  his  note  payable  to  the  seller  of  a  commodity,  and  actually  uses 
the  commodity  for  agricultural  purposes. 

Paper  payable  to  a  bank. — Where  the  farmer  makes  his  note  payable 
to  the  member  bank,  and  uses  the  proceeds  for  an  agricultural  purpose. 


Commercial  Banking  and  Credits  309 

such  a  note  may  likewise  be  discounted  by  a  Federal  Reserve  bank  as 
agricultural  paper.  However,  if  the  farmer  does  not  use  or  intend  to 
use  the  commodity  purchased  for  an  agricultural  purpose,  although  it 
is  capable  of  being  so  used,  the  note  in  question  should  be  treated  as 
commercial  paper  and  not  as  agricultural  paper. 

Agricultural  paper,  how  identified. — A  purchasing  member  bank 
would  have  to  satisfy  itself  in  some  satisfactory  way  that  the  bill  is 
substantially  of  an  agricultural  character.  The  nature  of  the  bill,  the 
name  of  the  acceptor,  and  the  name  of  the  drawer  would  probably  indi- 
cate that  a  farmer  was  the  purchaser,  and  an  implement  dealer  the 
seller  of  the  goods.  As  sufficient  evidence  of  its  agricultural  char- 
acter, a  simple  memorandum  attached  to  the  bill  stating  that  the  bill 
was  drawn  in  payment  of  agricultural  implements,  signed  either  by 
the  acceptor  or  the  drawer,  would  probably  be  sufficient. 

AMOUNT  OF  PAPER  REDISCOUNTABLE  BY  FEDERAL 

RESERVE  BANKS 

General  Statutory  Provisions 

Amount  of  paper  rediscountable  left  with  discretion  of  Federal 
Reserve  Board. — Notes,  drafts  and  bills  of  exchange,  drawn  or  issued 
for  agricultural  purposes  or  based  on  live  stock,  and  having  a  maturity 
not  exceeding  six  months,  exclusive  of  days  of  grace,  may  be  redis- 
counted  in  an  amount  to  be  limited  to  a  percentage  of  the  assets  of  the 
Federal  Reserve  bank,  to  be  ascertained  and  fixed  by  the  Federal 
Reserve  Board. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Amount  of  Agricultural  Paper  Rediscountable 

Limit  of  agricultural  paper  rediscountable  by  Federal  Reserve  bank. 
— The  total  amount  of  agricultural  paper  purchased  by  a  I-cderal 
Reserve  bank  according  to  law  should  not  exceed  a  fixed  percentage  of 
its  capital  stock,  to  be  fixed  from  time  to  time  for  each  Federal  Reserve 
bank  by  the  Federal  Reserve  Board.  The  percentage  fixed  by  the 
Board  difTers  in  the  various  districts.  Whenever  a  district  has  applied, 
the  maximum  limit  has  been  granted,  which  has  been  considered  to  be 
ninety-nine  per  cent,  of  the  capital  stock. 


3IO  Bank  and  Trade  Acceptances 

REDISCOUNT  OF  COMMODITY  PAPER 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Definition  of  commodity  paper. — Commodity  paper  is  defined  as  a 
note,  draft,  bill  of  exchange,  or  trade  acceptance,  accompanied  and 
secured  by  shipping-  documents,  or  by  a  warehouse,  terminal,  or  other 
similar  receipt  covering  approved  and  readily  marketable  non-perish- 
able staples  properly  insured. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  the  Rediscount  of  Commodity  Paper 

Definition  of  "staples." — Staples  include  manufactured  goods  as 
well  as  raw  materials,  provided  the  goods  are  non-perishable  and  have 
a  wide,  ready  market.  Included  in  this  are  cotton  yarn,  flour,  and 
potatoes. 

Commodity  paper  includes  paper  of  merchants. — "Commodity 
paper"  includes  not  only  paper  originating  with  the  producer,  but  also 
paper  of  merchants  and  others  when  the  commodity  is  not  carried  for 
speculative  or  purely  investment  purposes. 

Drafts  drawn  in  connection  with  sales  to  the  United  States  Gov- 
ernment excluded. — Drafts  drawn  in  connection  with  sales  to  the 
United  States  Government  of  lumber  and  other  materials  do  not  con- 
form to  the  requirements  of  commodity  paper. 

ELIGIBLE  COMMODITY  PAPER 

General  Statutory  Provisions 

What  constitutes  eligibility.-7-Notes,  drafts  and  bills  of  exchange 
secured  by  staple  agricultural  products,  or  other  goods,  wares,  or 
merchandise,  are  eligible  commodity  paper. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Relating  to  Eligible  Commodity  Paper 

Conditions  governing  eligibility. — To  be  eligible  for  rediscount  at 
the  special  rates  authorized  to  be  established  for  commodity  paper. 


Commercial  Banking  and  Credits  311 

such  a  note,  draft,  bill  of  exchange,  or  trade  acceptance,  must  also 
comply  with  the  respective  sections  of  this  regulation  applicable  to  it, 
must  conform  to  the  requirements  of  the  Federal  Reserve  bank  relat- 
ing to  shipping  documents,  receipts,  insurance,  etc.,  and  must  be  a 
note,  draft,  bill  of  exchange,  or  trade  acceptance  on  which  the  rate  of 
interest  or  discount,  including  commission  charged  the  maker,  does 
not  exceed  six  percentum  per  annum. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Eligible  Commodity  Paper 

Direct  discounts  of  mercantile  firms  not  allowed. — Federal  Reserve 
banks  are  not  allowed  to  discount  commodity  paper  directly  for  mer- 
cantile firms. 

Drafts  drawn  in  connection  with  sales  to  the  United  States  Govern- 
ment ineligible. — Drafts  drawn  in  connection  with  sales  to  the  United 
States  Government  cannot  be  treated  as  bills  of  exchange,  drawn 
against  actually  existing  value,  and  are  subject  to  the  limitations 
imposed  by  Section  5200  of  the  Revised  Statutes,  when  discounted  by 
national  banks.  Such  drafts  do  not  conform  to  the  requirements  of 
commodity  paper  as  defined  by  the  Federal  Reserve  Board  and  should 
not  be  discounted  at  the  rate  prescribed  for  such  paper. 

SUSPENSION  OF  SPECIAL  RATE  ON  COMMODITY  PAPER 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Rate  for  movement  of  crops. — As  the  special  rate  for  commodity 
paper  is  intended  to  assist  actual  producers  during  crop  moving 
periods,  and  is  not  designed  to  benefit  speculators,  the  Board  reserves 
the  right  to  suspend  the  special  rates  herein  provided  whenever  it  is 
apparent  that  the  movement  of  crops  which  this  rate  is  intended  to 
facilitate  has  been  practically  completed. 

REDISCOUNT  OF  RANK  ACCEPTANCES 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Banker's  acceptance  defined. — A  banker's  acceptance  is  dcfnied  a.-^  a 
draft  or  bill  of  exchange,  of  which   the  acceptor  is  a  hank  or  trust 


312  Bank  and  Trade  Acceptances 

company,  or  a  firni;  person,  company,  or  corporation  engaged  in  the 
business  of  granting  bankers'  acceptance  credits. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  the  Rediscount  of  Bank  Acceptances 

Eligible  acceptors,  how  determined. — The  question  of  determining 
the  eligibility  of  an  acceptor  is  left  to  the  discretion  of  the  Federal 
Reserve  banks  themselves.  The  Federal  Reserve  Board  does  not 
wish  to  see  concerns  regarded  as  eligible  acceptors  which  are  not  in 
the  habit  of  carrying  on  some  acceptance  business  regularly,  and 
which  are  not  generally  of  such  character  and  standing  as  to  qualify 
their  acceptance  as  a  "banker's  acceptance." 

Conditions  governing  negotiability. — A  bill  of  exchange,  in  order 
to  be  negotiable,  must  be  an  unconditional  order  to  pay,  on  demand, 
or  at  a  fixed  or  determinable  future  time,  a  certain  sum  of  money,  to 
order  or  to  bearer. 

Conditional  bills,  what  constitutes. — If  payment  is  dependent  upon 
the  happening  of  a  certain  contingency,  the  bill  is  conditional  and 
non-negotiable,  as  well  as  if  it  were  confined  to  the  proceeds  of  a 
particular  fund,  and  not  chargeable  to  the  credit  of  the  drawer. 

Conditional  acceptance. — A  general  acceptance  of  a  conditional  bill, 
or  a  conditional  acceptance  of  an  unconditional  bill,  makes  the  accept- 
ance a  conditional  one  and  destroys  its  negotiability. 

ELIGIBLE  BANK  ACCEPTANCES 

General  Statutory  Provisions 

Conditions  governing  eligibility. — Any  Federal  Reserve  bank  may 
discount  acceptances  of  the  kinds  described  below  in  "Regulations  of 
the  Federal  Reserve  Board"  which  have  a  maturity  at  the  time  of  dis- 
count of  not  more  than  three  months'  sight,  exclusive  of  days  of 
grace,  and  which  are  indorsed  by  at  least  one  member  bank. 


Commercial  Banking  and  Credits  313 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 
Relating  to  Eligible  Bank  Acceptances 

Maturity;  indorsement;  acceptances  eligible  for  rediscount. — Any 
Federal  Reserve  bank  may  rediscount  for  any  of  its  member  banks, 
bankers'  acceptances  which  have  a  maturity  at  the  time  of  discount 
of  not  more  than  three  months'  sight,  exclusive  of  days  of  grace.  Such 
acceptances  must  be  indorsed  by  at  least  one  member  bank ;  and  must 
grow  out  of  transactions  : 

(i)  Involving  the  exportation  or  importation  of  goods;  or 

(2)  Involving  the  domestic  shipment  of  goods,  provided  shipping 
documents  are  attached  at  the  time  of  acceptance ;  or 

(3)  Which  are  secured  at  the  time  of  acceptance  by  a  warehouse 
receipt  or  other  such  document  conveying  or  securing  title,  covering 
readily  marketable  staples ; 

(4)  Any  Federal  Reserve  Bank  may  also  acquire  drafts  or  bills  of 
exchange  drawn  on  member  banks  by  banks  or  bankers  in  foreign 
countries  or  dependencies  or  insular  possessions  of  the  United  States, 
for  the  purpose  of  furnishing  dollar  exchange.  To  be  eligible  for 
rediscount  the  bill  must  have  been  drawn  under  a  credit  opened  for 
the  purpose  of  conducting,  or  settling  accounts  resulting  from,  a 
transaction  or  transactions  involving: 

d)  The  shipment  of  goods  between  the  United  States  and  any 
foreign  country,  or  between  the  United  States  and  any  of  its 
dependencies  or  insular  possessions,  or  between  foreign  coun- 
tries ;  or 

(2)  The  domestic  shipment  of  goods,  provided  shipping  docu- 
ments are  attached  at  the  time  of  acceptance ;  or 

(3)  It  must  be  a  bill  which  is  secured  at  the  time  of  acceptance 
by  a  warehouse  receipt  or  other  such  (iocument  conveying  or 
securing  title  covering  readily  marketable  staples; 

(4)  Any  Federal  Reserve  Bank  may  also  acquire  drafts  or  bills 
drawn  by  a  bank  or  banker  in  a  foreign  country  or  dej>endcncy  or 
insular  possession  of  the  United  States  for  the  pur])ose  of  furnish- 
ing dollar  exchange,  and  accepted  by  a  member  hank.  Such  drafts 
or  bills  may  be  acquired  prior  to  acceptance  provided  they  have 
the  endorsement  of  a  member  bank. 


314  Bank  and  Trade  Acceptances 

OPINIONS  OF  COUNSEL  AND  RULINGS 
Relating  to  Eligible  Bank  Acceptances 

Acceptances  indorsed  by  member  banks  of  another  district. — Fed- 
eral Reserve  bank  may  discount  acceptances  based  on  the  importa- 
tion or  exportation  of  goods,  provided  they  have  a  maturity  at  time  of 
discount  of  not  more  than  three  months,  and  provided,  further,  that 
they  are  indorsed  by  at  least  one  member  bank.  It  is  immaterial 
whether  this  member  bank  is  located  in  the  district  of  the  Federal 
Reserve  bank  which  is  making  the  discount  or  in  any  other  district, 
the  term  "member  bank"  being  broad  enough  to  include  member 
banks  wherever  located. 

Discount  of  acceptances  not  paid  at  Federal  Reserve  bank. — Accept- 
ances, when  due,  should  be  paid  by  checks  on  the  local  Federal 
Reserve  bank  in  order  that  they  may  be  charged  to  the  account  of  the 
acceptor  on  the  day  of  maturity,  or  else  that  acceptances  should  be 
paid  by  checks  through  the  clearings.  Federal  Reserve  banks  may, 
therefore,  charge  discount  for  one  additional  day,  except  in  cases 
where  satisfactory  arrangements  are  made  to  make  actual  cash  pay- 
ments at  the  Federal  Reserve  bank  on  the  day  of  maturity. 

Paper  of  acceptance  corporation. — Acceptances  of  an  acceptance 
corporation  ought  to  be  dealt  with  exactly  as  would  be  the  acceptances 
of  a  prime  private  banker.  These  acceptance  corporations  are  in  the 
same  relation  to  the  Federal  Reserve  System  as  the  private  bankers. 
They  cannot  become  members,  but,  inasmuch  as  they  expect  to  give 
full  information  about  their  own  financial  standing  and  the  nature 
of  their  acceptances,  and  as  they  exercise  a  most  important  function 
for  the  further  development  of  our  acceptance  business,  and  discount 
markets,  their  operation  ought  to  be  encouraged  in  every  respect. 

Gold  coin  and  gold  buUion  as  "goods." — Gold  coin  and  gold  bullion 
may  properly  be  considered  as  goods. 

Warehouse  receipts  of  independent  warehouses. — The  Federal 
Reserve  banks  should  make  sure  in  purchasing  or  discounting  bank- 
ers' acceptances  or  other  bills  which  are  secured  by  v/arehouse  receipts, 
that  the  receipt  is  issued  by  a  warehouse  which  is  independent  of  the 
borrower. 


Commercial  Banking  and  Credits  315 

Differential  rate  for  member  bank  acceptances. — The  differential 
rate  between  member  bank  acceptances  and  the  acceptances  of  large 
non-member  institutions,  well  known  throughout  the  country,  and, 
whose  acceptances  necessarily  have  a  broad  market,  usually  amount  to 
one-quarter  of  one  per  cent.  A  higher  differential  rate  than  this  figure 
is  looked  upon  by  the  Board  as  inadvisable. 

INELIGIBLE  BAXK  ACCEPTANXES 

Opinions  of  Counsel  and  Rulings 

Chattel  mortgages  ineligible. — Federal  Reserve  banks  are  directed 
to  consider  as  ineligible  bills  drawn  against  the  security  of  chattel 
mortgages  on  cattle  and  the  like,  whether  accepted  by  member  or 
non-member  banks. 

Bills  payable  outside  the  United  States. — Any  bill  which  is  payable 
elsewhere  than  in  the  United  States  would  not  be  eligible  for  purchase 
as  a  banker's  acceptance  even  though  eligible  in  all  other  respects. 
The  acceptance,  however,  might  properly  be  purchased  as  a  bill  of 
exchange  payable  in  a  foreign  country. 

EVIDENCE  OF  ELIGIBILITY  OF  BANK  ACCEPTANCES 

REGULATIONS  OF  THE  FEDERAL  RESER\'E  BOARD 

Evidence  to  be  furnished  Federal  Reserve  Bank. — .\  Federal 
Reserve  bank  must  be  satisfied,  either  by  reference  to  the  acceptance 
iself  or  otherwise,  that  it  is  eligible  for  rediscount.  Satisfactor}'  evi- 
dence of  eligibility  may  consist  of  a  stamp  or  certificate  aflixcd  by  the 
acceptor  in  form  satisfactory  to  the  Federal  Reserve  bank. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Evidence  of  Eligirilitv  nv  I'.ank  Acceptances 

Requirement  of  evidence. —  The  l""ederal  Reserve  bank  reserves  tlu* 
right  to  ask  State  member  banks  for  evidence  underlying  the  certifica- 
tion given  to  it,  and  the  bank  examiner  may  require  evidence  from  the 


3i6  Bank  and  Trade  Acceptances 

national  banks  to  this  effect.  Member  banks  would,  therefore,  best 
protect  themselves  by  stipulating  for  themselves  the  right  at  times  to 
ask  for  substantiation  of  assurances  given  by  their  customers. 

MATURITY  RELATING  TO  BANK  ACCEPTANCES 

General  Statutory  Provisions 

Period  of  maturity. — Any  Federal  Reserve  bank  may  discount 
acceptances  which  have  a  maturity  at  the  time  of  discount  of  not  more 
than  three  months'  sight,  exclusive  of  days  of  grace. 

REGULATIONS  OF  THE  FEDERAL  RESERVE  BOARD 

Relating  to  Maturity 

Requirement  as  to  maturity  of  bankers'  acceptances  discountable. — 
Federal  Reserve  banks  may  discount  for  their  member  banks  "bank- 
ers' acceptances"  which  have  a  maturity  at  the  time  of  discount  of  not 
more  than  three  months'  sight,  exclusive  of  days  of  grace. 

OPINIONS  OF  COUNSEL  AND  RULINGS 

Relating  to  Maturity  of  Bank  Acceptances 

Renewals. — Acceptance  business  of  Federal  Reserve  banks  is  not 
restricted  to  the  original  transaction  only,  if  the  transaction  has  not 
been  liquidated.  Member  banks  may  renew  the  acceptance  when  the 
first  acceptance  matures,  and  there  is  no  reason  why  a  Federal  Reserve 
bank  may  not  discount  such  renewal  acceptances,  although  a  Federal 
Reserve  bank  must  not  engage  in  advance  to  make  such  discount  of  a 
renewal. 

INDORSEMENT 
General  Statutory  Provisions 

Acceptances  indorsed  by  member  banks  discountable. — Any  Federal 
Reserve  bank  may  discount  acceptances  which  are  indorsed  by  at 
least  one  member  bank. 


Commercial  Banking  and  Credits  317 

Blank  indorsement. — An  acceptance  which  is  indorsed  in  blank  can 
change  ownership  from  one  holder  to  another  without  being  indorsed 
by  each  subsequent  holder,  and  the  title  would  pass.  It  might  be  inter- 
esting in  this  connection  to  note  the  expression  by  the  Federal  Reserve 
Board  to  the  effect  that  it  looks  forward  to  the  time  when  only  bank- 
ers' acceptances  bearing  three  responsible  signatures,  being  those  of 
the  acceptor,  the  drawer,  and  the  indorser,  will  be  bought. 

Readily  marketable  staples. — Any  member  bank  may  accept  drafts 
which  are  secured  at  the  time  of  acceptance  by  a  warehouse  receipt 
or  other  such  document  conveying  or  securing  title  covering  "readily 
marketable  staples."  Banks,  as  a  matter  of  prudence  and  protection 
to  themselves,  should  not  consider  as  eligible  any  staple  which  is  in 
its  nature  so  perishable  as  not  to  be  reasonably  sure  of  maintaining 
its  value  as  security  at  least  for  the  life  of  the  draft  which  is  drawn 
against  it.  A  more  extended  definition  of  a  readily  marketable  staple 
would  be  "an  article  of  commerce,  agriculture  or  industry,  of  such 
uses  as  to  make  it  the  subject  of  constant  dealings  in  ready  markets 
with  such  frequent  quotations  of  prices  as  to  make  (a)  the  price  easily 
and  definitely  ascertainable,  and  (b)  the  staple  itself  easy  to  realize 
upon  by  sale  at  any  time. 

Acceptance  of  drafts  drawn  abroad  and  secured  by  foreign  ware- 
house receipts. — A  draft  drawn  abroad,  payable  in  the  United  .Stales 
in  dollars  and  secured  by  a  warehouse  receipt  covering  readily  market- 
able staples  stored  in  a  warehouse  located  in  a  foreign  country,  is 
eligible  for  acceptance  by  a  member  bank  and  after  acceptance  is 
eligible  for  rediscount  by  a  Federal  Reserve  bank,  but  is  not  eligible 
for  purchase  by  a  Federal  Reserve  bank  in  the  open  market. 

Acceptance  of  drafts  secured  by  warehouse  receipts. — No  draft 
which  is  secured  by  a  warehouse  receipt  should  properly  be  consid- 
ered eligible  for  acceptance  unless  the  goods  covered  by  the  warehouse 
receipt  are  being  held  in  storage  pending  a  reasonable  immediate  sale, 
shipment,  or  distribution  into  the  process  of  manufacture.  Any  draft 
therefore  which  is  drawn  to  carry  goods  for  speculative  jjurposes  fir 
for  an  indefinite  period  of  time  without  the  purpose  to  sell,  ship  or 
manufacture  within  a  reasonable  time,  should  not  be  considered 
eligible  for  acceptance. 


3i8  Bank  and  Trade  Acceptances 


Qualified  acceptance  of  sight  draft. — A  trade  acceptance  may  be 
created  by  an  acceptance  of  a  sight  draft  in  which  the  acceptor  agrees 
to  pay  at  a  future  date.  Ordinarily  this  would  constitute  a  qualified 
acceptance,  and  hence  release  the  drawer  and  endorsers.  If  the  drawer 
assents  to  the  qualified  acceptance,  or  does  not  dissent  within  a  rea- 
sonable time,  the  instrument  is  considered  to  be  a  trade  acceptance 
and  therefore  eligible  for  discount  if  otherwise  in  order. 

Trade  acceptance  to  finance  structural  work  and  other  building  op- 
erations in  general. — A  draft  drawn  by  a  manufacturer  or  material- 
man upon  a  builder  to  cover  the  cost  of  materials  sold  to  the  builder 
is  eligible  for  rediscount  as  a  trade  acceptance  when  accepted  by  the 
builder.  It  is  equally  clear,  however,  that  if  the  nature  of  the  contract 
under  which  the  building  operations  are  being  conducted  is  such  that 
the  contractor,  for  instance,  does  not  get  title  either  to  the  materials 
furnished  or  to  the  building  as  it  is  being  erected,  he  cannot  properly 
make  a  trade  acceptance  of  a  draft  drawn  upon  him  by  the  sub-con- 
tractor or  builder,  it  being  apparent  that  he  has  not  been  a  purchaser 
of  goods  sold.  If  the  drawer  of  the  draft  has  sold  goods  to  the  drawee, 
the  drawee  may  properly  accept,  and  the  draft  thus  accepted  would 
constitute  a  trade  acceptance  if  otherwise  in  conformity  with  the 
Board's  regulations,  but  it  should  be  noted  that  labor  in  itself  is  not 
considered  goods  within  the  meaning  of  these  regulations.  The  Board 
has  ruled,  however,  that  a  draft  drawn  to  cover  the  purchase  price  of 
goods  sold,  plus  the  cost  of  installing  those  goods,  may  be  eligible  for 
acceptance  as  a  trade  acceptance. 


/  SECTION  VI 

ACCEPTANCES  AS  AN  INVESTMENT 

Prime  bank  acceptances  are  especially  desirable  as  an  investment 
because  they  combine  in  a  degjee  not  found  in  any  other  commercial 
instrument  the  three  important  factors  of  safety,  short  maturity,  and 
ready  convertibility  into  cash. 

SAFETY 

When  a  bank  accepts  a  draft  it  has  created  an  obligation  which  it 
must,  if  it  is  to  retain  its  standing-,  pay  at  maturity.  The  acceptance 
of  a  bank  is  as  good  as  the  bank  itself,  ranking  with  its  cashier's  check 
or  certificate  of  deposit.  But  the  drawer  and  indorsers  of  an  accep- 
tance are  also  liable,  providing  it  is  not  paid  at  maturity  and  is  prop- 
erly protested.  If  one  is  satisfied  that  the  funds  he  has  deposited  in 
his  bank  are  safe,  he  can  certainly  find  no  objection  from  the  stand- 
point of  security  to  purchasing  the  acceptance  of  that  same  bank,  or 
of  another  bank  equally  as  good  or  better. 

England,  which  heretofore  has  financed  the  foreign  commerce  of 
the  world,  has  been  enabled  to  do  so  largely  because  her  bankers  have 
purchased  large  amounts  of  acceptances  and  have  loaned  enormous 
sums  at  very  low  rates  to  dealers  to  enable  them  to  carry  bills.  Their 
long  experience  has  shown  them  that  prime  acceptances  are  the  safest 
short-term  investment  they  can  find. 

Our  prime  acceptances  are  just  as  good  as  those  whicii  have  proved 
so  satisfactory  in  England,  and  possibly  better,  because  an  eligible 
acceptance  here  is  against  a  shipment  of  goods  or  is  secured  by  goods ; 
the  only  exception  being  bills  for  dollar  exchange,  in  which  case  they 
are  drawn  by  a  bank  and  accepted  by  a  bank. 

MATURITY 

Few  acceptances  appear  in  this  market  having  a  maturity  longer 
than  four  months.  The  great  majority  are  drawn  payal)lc  ninety  days 
after  sight.     Within  these  limitations  the  investor  can  usually  secure 


320  Bank  and  Trade  Acceptances 

in  the  market  bills  approximating-  any  maturity  he  may  desire,  wfiether 
it  be  for  only  three  or  four  weeks  or  for  the  longer  period.  We  have 
no  other  form  of  investment  which  can  compete  with  acceptances  in 
this  respect. 

The  two  features  just  mentioned  make  prime  acceptances  especially 
fitted  as  an  investment  for  funds  of  corporations,  firms  or  individuals, 
being  accumulated  for  a  special  purpose,  which  will  be  paid  out  within 
a  short  time,  such  as  funds  for  the  payment  of  a  dividend. 

CONVERTIBILITY  INTO  CASH 

Under  the  provisions  of  the  Federal  Reserve  Act,  the  various  Fed- 
eral Reserve  banks  may  purchase  acceptances  in  the  open  market. 
The  acceptances  must,  of  course,  be  eligible ;  that  is,  must  arise  out 
of  one  of  the  four  kinds  of  transactions  mentioned  heretofore. 

As  will  be  seen,  the  acceptance  of  any  National  bank  is  eligible. 
Non-member  banks  and  bankers  may  make  their  acceptances  eligible 
by  filing  with  the  Federal  Reserve  Bank  a  statement  of  financial  con- 
dition, in  form  to  be  approved  by  the  Federal  Reserve  Board.  They 
must  also  agree  in  writing  with  the  Federal  Reserve  Bank  to  inform 
it,  upon  request,  concerning  the  transactions  underlying  their  accep- 
tances. Acceptances  which  the  Reserve  banks  cannot  purchase  or 
rediscount  are  termed  ineligible,  and  do  not  command  as  favorable  a 
rate  in  the  market  as  eligible  bills. 

The  figures  in  any  number  of  the  Federal  Reserve  Bulletin  will 
show  the  large  volume  of  acceptances  which  have  been  purchased  by 
the  various  Federal  Reserve  banks.  This  power  to  purchase  and  wil- 
lingness on  the  part  of  the  Federal  Reserve  banks  to  do  so,  as  evi- 
denced by  the  extent  of  their  transactions,  make  a  prime  eligible 
acceptance  in  the  hands  of  a  member  bank  the  most  liquid  investment 
that  bank  has.  A  member  bank  desiring  to  dispose  of  the  acceptances 
of  other  banks  which  it  holds,  indorses  those  acceptances  and  sells 
them  to  its  Federal  Reserve  bank  at  the  prevailing  rate  for  the  pur- 
chase of  acceptances.  It  should  be  noted  that  bank  acceptances  are 
sold  to  the  Federal  Reserve  banks,  not  rediscounted.  The  purchase 
rates  for  prime  indorsed  bills  are  usually  below  the  rediscount  rates 
for  paper.  The  nearer  the  acceptance  approaches  maturity  the  more 
favorable  rate  it  commands  at  the  Reserve  banks. 


Commercial  Banking  and  Credits  321 

The  non-member  bank,  corporation  or  individual  desiring  to  dispose 
of  acceptances  before  maturity  has  always  been  able  to  do  so  to  deal- 
ers in  the  open  market,  and  ordinarily  at  very  little  difference  from 
the  rate  at  which  the  bills  were  purchased.  In  this  connection  it  must 
be  remembered  that  acceptances  are  discounted  for  the  number  of  days 
they  have  to  run  from  date  of  sale  until  maturity. 

Bank  acceptances  are  often  drawn  for  odd  amounts,  representing 
the  value  of  a  shipment.  They  vary  in  size  from  a  few  hundred  dol- 
lars to  several  hundred  thousand  dollars.  It  is,  therefore,  usually 
possible  for  an  investor  to  purchase  approximately  any  amount  he  may 
desire, 

ACCEPTANCE  OF  DRAFTS  BY  STATE  BANK  MEMBERS 

The  Federal  Reserve  Board  is  without  authority  to  permit  a  member 
bank  to  accept  drafts  drawn  against  it  in  domestic  transactions  in 
excess  of  50  per  cent,  of  the  capital  and  surplus  of  the  accepting  bank. 
It  may  authorize  a  member  bank  to  accept  drafts  up  to  100  per  cent., 
which  amount  may  include  both  those  which  grow  out  of  transactions 
involving  the  exportation  or  importation  of  goods  and  those  which 

ELIGIBILITY  FOR  REDISCOUNT  OF  MEMBER  BANK 

ACCEPTANCES 

Under  the  terms  of  section  13  any  draft  or  bill  of  exchange  which 
a  member  bank  has  the  power  to  accept  under  the  provisions  of 
that  section,  is  technically  eligible  for  rediscount  by  a  Federal  Reserve 
Bank.  This  does  not  mean,  however,  that  Federal  Reserve  Banks  arc 
required  by  law  to  rediscount  every  such  acceptance  tendered  to  them 
for  that  purpose.  In  developing  a  general  market  for  acceptances  the 
Federal  Reserve  Banks  are  necessarily  called  upon  to  carry  a  large 
amount  of  this  class  of  paper,  but  it  is  important  that  the  Federal 
Reserve  Board  and  the  Federal  Reserve  Banks  should  take  all  neces- 
sary steps  to  insure  conservatism  in  the  exercise  of  the  acceptance 
power  by  member  banks.  The  policy  of  the  Board,  therefore,  as  re- 
flected in  its  various  rulings,  has  been  to  caution  I-'cderal  Reserve 
Banks  that  in  rediscounting  drafts  accepted  in  domestic  transactions 
they  should  consider,  and  m  many  cases  investigate,  the  circumstances 
under  which  the  draft  was  accepted  in  order  to  determine  whether  or 
not  the  particular  transaction  complies  with  the  spirit  was  well  as  the 
letter  of  the  statute. 


PART  IV 

BANK  AND  TRADE  ACCEPTANCES 
COMMERCIAL  BANKING 

AND 

CREDITS 


FORMS,  AGREEMENTS,  RECORDS,  ETC. 


Form 

No. 

1 

(( 

No. 

2 

« 

No. 

3 

« 

No. 

3 

(< 

No. 

4 

<< 

No. 

5 

(< 

No. 

6 

(( 

No. 

7, 

« 

No. 

8 

PART  IV 

Forms,  Agreements,  Records,  Etc. 

Form  of  Trade  Acceptance  for  General  Use,  Based 

on  Domestic  Sales  of  Merchandise. 
Form  of  Trade  Acceptance  Based  on  Domestic  Sales 
of  Merchandise,  with   words  "Maturity  being  in 
conformity  with  original  terms  of  purchase,"  in- 
serted. 
3a.  (Front)  Form  of  Trade  Acceptance  with  Explanation 

Slip  for  Buyer. 
3b.  (Reverse)     Form  of  Trade  Acceptance  with  Record 
Slip  for  Buyer. 
Form  of  Trade  Acceptance  Adapted  for  General  Use. 
Form  of  Trade  Acceptance  Adapted  for  General  Use. 
Form  of  Trade  Acceptance  Adapted  for  General  Use. 
Form  of  Trade  Acceptance  Adapted  for  General  Use. 
Method  of  Propaganda  Used  by  Commercial  Houses 
to  Encourage  the  Use  of  Trade  Acceptances. 
No.     9.     Method  Employed  by  Commercial  Houses  to  Point 
Out  the  Advantages  in  the  Use  of  Trade  Accept- 
ances. 
No.  10.     Acceptances   in   Foreign   Countries    (Canadian    Prac- 
tice). 
No.  11.     Ordinary  Banker's  Acceptance;  Specimen  Bill  Drawn 

Locally. 
No.  12.     Bank  Acceptance  Arising  Out  of  a  Foreign  Transac- 
tion;     Specimen    of    Bill    Drawn    in    a    Foreign 
Country. 
No.  13.     Forms  of  Certificates  Used  to  Indicate  Eligibilitv  of 
Bankers'  Acceptances  for  Re-discount  with   Fed- 
eral Reserve  Banks. 
No.  14.     Specimen  of  Bank  Acceptance  Arising  Out  of  a  Trans- 
action Involving  the  Exportation  or  Importation 
of  Goods. 
No.  15.     Bank  Acceptance  Arising  Out  of  a  Transaction  In- 
volving the  Domestic  Shipment  of  Goods. 
No.  16.     Form  of  P.ank  Accei)tance  Based  upon  a  Transaction 

Involving  Warehouse  Rcceii)ts. 
No.  17.     Commercial  Domestic  Acceptance  Agreement. 

325 


326 


<< 

« 


Bank  and  Trade  Acceptances 

No.  18.  Commercial  Acceptance  Agreement  Used  in  Connec- 
tion with  Acceptance  Credits  Granted  by  a  Bank 
for  the  Purpose  of  Financing  Imports  or  Exports 
or  Merchandise  Stored  in  Warehouses  in  the 
United  States  or  Abroad. 

No.  19.  Trust  Receipt  Used  in  Connection  with  Acceptance 
Credits. 

No.  20.  Trust  Receipt  Used  in  Connection  with  Acceptance 
Credits. 

No.  21.     Trust  Receipt  (Documents  for  Warehousing). 

No.  22.     Trust  Receipt  (For  Withdrawal  of  Collaterals). 

No.  23.     Bailee  Receipt. 

No.  24.     Form  of  Acceptance  Register  Book. 


Commercial  Banking  and  Cp£dits 


327 


FORM  NO.  1 
Form  of  Trade  Acceptance  Based  on  Domestic  Sale  of  Merchandise 


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OOCXS  FROM  THE  ORAWEK.  THE  DRAWEE  MAT 


>• 


EXPLANATION— FORM  NO.  1 


Form  of  Trade  Acceptance  Based  on  Domestic  Sales  of  Merchandise 


The  acceptance  is  daily  becoming  more  popular.  It  eliminates  the 
old  system  of  "open  accounts."  Instead  of  a  merchant  selling  to  a 
buyer  on  60  days  open  account,  the  buyer  accepts  a  draft  at  (50  days 
date  or  sight,  which  the  merchant  can  discount  witii  his  bankers,  thus 
avoiding  a  tie-up  of  his  capital. 

Some  authorities  have  suggested  that  the  words  "maturity  being  in 
conformity  with  original  terms  of  purchase"  be  inserted  following  the 
word  "drawer"  where  it  first  appears  in  the  form  above,  the  purpose 
being  to  guard  against  the  use  of  the  trade  acceptance  in  settlement 
of  past  due  accounts.  It  should  be  remembered  that  trade  accept- 
ances are  used  in  connection  with  current  transactions  only. 


328  Bank  and  Trade  Acceptances 


FORM  NO.  2 


Form  of  Trade  Acceptance  Based  on  Domestic  Sale  of  Merchandise, 
with  Words  "Maturity  Purchase"  Inserted 


-        t     .  t TRADE  ACCEPTANCE          Due-' r-i-'- 0,1^10 

No.137-                   /-.         hi^w  York,  NVT.,    --r.-r   ;•  i:  /  ,           m, a—     $15,  "00 .00       -       ■ 

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F^^tl'en  vhcAi-'i^'^L- "S  :c'-:  V!!k^;0Q.''lOO..---- --=--- .----^-Dollars    : 

Th^Mgation  ef  th|ia£cept^3iei;e^  irises  out  of  the  purchaseof  goods  from  the  drawer,  maturity' 
beita  in  con|opnuty[i.'kh  orL^^ial  tef^of  purchase.    The  dr;iwee  may  accept  this  bill  payabk'  at 
anvibaiik,  t«st;  compai^y  oi^ankers  office  in  the- United  States  which  he  may  designate, 

iName  ri  draw**'          P    -,<■'.          ■■ 

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..-■                         —                               V--                                 ^j 

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• 

EXPLANATION— FORM  NO.  2 

With  the  exception  of  the  words  "maturity  being  in  conformity  with 
original  terms  of  purchase,"  this  form  of  acceptance  is  the  same  as 
form  No.  1.  These  words  are  inserted  for  the  purpose  of  guarding 
against  the  use  of  the  acceptance  in  settlement  of  past  due  accounts. 


Commercial  Banking  and  Cbzdits 


329 


FORM  NO.  3A  FRONT 
Form  of  Trade  Acceptance  (Front)  with  explanation  slip  for  buyer 


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330 


Bank  and  Trade  Acceptances 


FORM  NO.  3B  REVERSE 


Form  of  Trade  Acceptance  (Reverse)  with  Record  Slip  for  Buyer 


EXPLANATION— FORM  NO.  3A  (FRONT) ;  FORM  NO.  3B 

(REVERSE) 

This  form  of  trade  acceptance  serves  the  same  purpose  as  those 
shown  in  forms  Nos.  1  and  2  preceding,  and  in  addition,  furnishes  an 
advantage  in  recording  the  particulars  of  the  transaction.  In  usage, 
the  seller  fills  in  the  particulars  required  in  the  trade  acceptance  and 
sends  it  along  with  the  part  following  to  the  acceptor,  the  reverse  side 
of  which  serves  as  a  record  sheet  for  the  latter.  After  having  been  ac- 
cepted, the  trade  acceptance  is  returned  to  the  seller. 

FORMS  OF  TRADE  ACCEPTANCE 


The  following  forms  of  trade  acceptances  are  given  for  the  con- 
venience of  commercial  and  financial  houses,  from  which  a  choice  may 
be  made  of  a  particular  form  which  is  best  adapted  to  their  use.  The 
principles  involved  in  the  use  of  trade  acceptances  being  the  same,  the 
only  difference  in  the  following  is  in  the  wording: 


CoMMEnciAL  Banking  and  Credits 

FORM  NO.  4 

Form  of  Trade  Acceptance  Adapted  for  General  Use 


331 


No. 


SJTRADE  ACCEITANCi; 


O 

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..aft«  r. 


The  obligation  of  the  acceptor^ereof  arise  ^ut  of 


To_ 


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S  By_ 


FORM  NO.  5 


Form  of  Trade  Acceptance  Adapted  for  General  Use 


No... 


J 


Q 
-•«■• 


in  settlement  of  tiie  purchas<f^f  goods  &  %iUed  ia9>ur  ii 
To 


TRADL  ACCEPTANCE 


cjfWr  datj)  fay  t< 

9 


t 

OICO 


Nc 


Specimen  Form 


.19. 


the  order  of  OURSELVES 

"« DoUaa 


(Uted. 


By- 


Due. 


.19 


a 


Vi 


332 


Bank  and  Trade  Acceptances 


FORM  NO.  6 
Form  of  Trade  Acceptance  Adapted  for  General  Use 


No. 


Thirty 
Sixty 
Ninety  )   Q 


!  days  after  < 
O  { 


Cd 


To 


date 

f 

^  sight 


Thi 


?obU( 
akises  out  of  the 


a 


J 

flon  of 
)urchas  i 


Specimen  Form 
19—    I. 


ay  to  t^e  orde|^f  OURSELVES 

1 

I 

■s - ~ 


..Dollars. 


#16  acceptor  hereof 

s  of  goods  from  the  drawer. 


19 
4> 

1 


c 


FORM  NO.  7 


Form  of  Trade  Acceptance  Adapted  for  General  Use 


No.. 


Q 
u 

..f«.. 

u 
u 

< 


To- 


I 


(Nan  e  of  Pa;  ee) 


I 

■8- 

1.   The 


:£■■ 


«  yi  5  <« 

ariiia  out  <  gthe  pufehase  <i§goods  from  the  drawer, 
as  ]  )er  mvoi  3e.„ jg 


Va  ue  recaikred  e.uS  charge 


Specimen  Form 
Reading,  Pa., — 19 |.. 

.....Pay  to  the  order  of 


^ligaticili  of  tie  acceptor  hereof 


.\>L 

to  account  of 


e 
o 


Q 


2 

c 


(Name  of  Corporation) 


Dollars. 


Treasurer. 


Commercial  Banking  and  Cp£dits 


333 


FORM  NO.  8 

Method  of  Propaganda  used  by  Commercial  Houses  to  encourage  the 

use  of  Trade  Acceptances 


Before  you  decide  how  you  will  settle  the  accompanying  account  may  we  request 
you  to  consider  the  three  methods  by  which  purchases  of  "American  Merchandise" 
products  may   be   retired. 


NO.    1 

Discounting  less  2%  10 
days  from  date  of  ship- 
ment. 


RESULT 

A  saving  to  you  of  2%  In 
return  for  the  Investment 
of  your  capital  in  goods 
which  you  have  yet  to  sell. 


NO.    2 

Completing  and  returning 
the  Trade  Acceptance  or 
Negotiable  Receipt  attach- 
ed. 

RESULT 

A  saving  of  1%  In  cost, 
and  60  days'  time  during 
which  you  may  use  the  re- 
ceipts coming  in  from  the 
sale  of  the  goods  before  you 
will  be  called  upon  to  make 
any    investment   in   them. 

The  strengthening  of  your 
credit  standing  by  adver- 
tising your  promptness  in 
meeting    obligations. 


NO.    S 

Making     payment     net,     SO 
days  from   date  of  shipment. 


RESULT 

Necessitates  paying  full 
price  for  goods  which  might 
be  purchased  for  99%  of  list 
price.  Parting  with  full  cost 
within  30  days  when  by  co- 
operation and  taking  advant- 
age of  up-to-date  methods 
60  days'  time  might  ha  legit- 
imately   taken. 


It  Is  evident  that  methods  No.  1  and  No.  2  lead  to  profitable  results  while  method 
No.  3  is  unprofitable  to  purchaser  and  seller  alike.  Purchasing  on  an  open-account 
basis  Is  rapidly  becoming  to  be  looked  upon  as  unprofitable,  Inefficient  and  therefore 
obsolete.    Give    Trade    Acceptances    on    Discount. 


a 

O 
Z 

•< 
H 
0. 
H 
O 

y 
a 

< 


c 


04 


Nsw  York.   N.   T «.... 

days    after    date    pay    to    the    order    of    American 

Merchandise    Distributing    Co. 
Dollars 


The   obligation  of   the   acceptor  hereof 

arises  out  of  the  purchase  of  goods 

from   the   drawer. 

In  Settlement  of  our  Invoice  of  1».. 


AMERICAN   MERCHANDISE 

DIBTRIBUTINQ   CO. 


To. 


By    President 


EXPLANATION— FORM  NO.  8 


Form  No.  8  illustrates  a  method  of  i)ropagaiula  used  by  coiiiiiuTcial 
houses  to  encourage  the  use  of  Acceptances.  It  points  out  clearly  the 
usual  forms  of  settling  accounts  and  the  advantages  and  disadvantages 
which  accompany  such  modes  of  settlement. 


334  Bank  and  Trade  Acceptances 


FORM  NO.  9 

Method  employed  by  commercial  Houses  to  point  out  the  advantages 

in  use  of  trade  acceptance 


American  Merchandise  Distributing  Co.  Products  are  Cheaper 

if  purchaeed  on  acceptance  terms  instead  of  open  account. 

Had  you  accepted  the  draft  sent  you  with  original  invoice  of 
$  100  this  purchase  would  have  cost  you  but  $  ijo 

a  saving  of  $  ioo>  and  you  would  have  had  until 

19. . .  .,  to  make  settlement  into  the  bargain. 

In  other  words  you  can  carry  American  Merchandise  Dis- 
tributing Co.  products  without  investing  a  $  $  $  of  your  capital 
providing  you  can  turn  a  jobber  quantity  of  our  goods  in  60 
days. 

NEXT  TIME  WHY  NOT  SETTLE  VIA  THE 
TRADE  ACCEPTANCE 
IT  WILL  PAY  YOU  AND  PROVE  CONVENIENT. 


EXPLANATION— FORM    NO.   9 

This  form  is  sent  to  purchasers,  with  a  receipt  for  cash  settlement, 
pointing  out  the  advantages  in  the  use  of  the  trade  acceptance  as  a 
means  of  settling  accounts.  It  is,  as  the  preceding  form,  a  good  meth- 
od of  propaganda  encouraging  the  use  of  trade  acceptances. 


Commercial  Banking  and  Cp£dits 

FORM  NO.  10 
Acceptances  in  Foreign  Countries  (Canadian  Practice) 


335 


TO  THE   UNION  BANK  OF   CANADA 


Tb*  uaoed  bin  for  |- 


-<Uted- 


-tt. 


-represent*  en  indebtcdiMM 
— — the  Dnire*  thereof. 


pajnbl*  at 

due  to  the  undertigned  by  . 

for  goods  actually  supplied  by  the  undersigned  to  Drawee,  and  the  undersigned  hereby  assign  and  transfer 
to  you  the  said  indebtedness  of  the  Drawee  thereof  and  warn  protest  and  notice  of  noc  -  acceptance  of 
the  said  bill ;  and  authorize  you  at  the  expense  and  risk  of  the  undersigned  in  event  of  non-acceptance  to 
sue  for  and  recover  the  amount  of  such  indebtedness,  with  full  power  to  compound  or  compromise  the 
same,  and  the  onderaigned  agrees  to  furnish  you  with  a  detailed  statement  of  such  indebtedness  and  with  alt 
evidence  necesasry  to  establish  the  same  at  the  undersigned's  expense ;  and  if  the  amount,  or  any  part  thereof 
should  bt  paid  to  b(  we  will  nceiv*  it  as  your  Agents  only,  and  wilt  forthwith  pay  ov^  (he  same  to  yo«. 


Oate4.ai- 


Form  of  Specific  AsBignoient  of  Account.    (Reduced  size)    Attached  to 
trade  paper  drawn  on  firms  who  wHl  not  accept  drafts. 


Form 


Reduced'  Size' 


V^  Sil* 


Union   Bank  of  Canada 

TORONTO 

MMOM  for  R«turnlnf  Atuobwt 
BlUa  V  CroMM  X. 

Not  doe. 

No  funds. 

Will  remjt. 

No  account. 

Office  closed. 

Party  will  write. 

Party  has  wntlen. 

Party  in  difficulties. 

Not  sufRcient  funds. 

Goods  not  received. 

Amount  not  correct. 

Goods  not  as  ordered. 

No  instructions  to  pay. 

Canaot  pay  at  presenL 

Will  not  pay  exchange. 

Wanta  extetuion  of  time. 

Not  In  town  at  present. 

Paymeot  stopped  by  makers. 

Notice  given  but  no  response. 

Claims  credit  of  i^ooda  returned. 

Reasons  endorsed  on  back  of  biU. 

Payment  refused— no  reasons  given. 

Acceptance  refused — no  reasons  fiven. 

Acceptance  refused — paid. 


B«U  wsswaMs  lla*  tor  erHval 
•I  AoWa.  II  ■■■<nwpl«4.  •««■*« 
■•la  ialialte    mum    •■ 


DNION  BANK  OF  CANADA 
TOBOJVTO 


"Hold  for  Arrival  of 
Goods"  slip  usually 
attached  to  "sight" 
blHs  and  to  bills 
drawn  contcmpor- 
aneously  with 
shipment  of  goods. 


"Reasons  for  Refusal"  slip — 

attached  to   bills  returned  un- 

accepted  or  unpaid. 

EXPLANATION— FORM  NO.  10 
Forms  Nos.  10  a,  b,  and  c,  illustrate  to  what  extent  the  acceptance 

idea  prevails  in  other  countries  (Canadian  practice). 

Form  No.  10  a,  above  given,  is  used  in  assipninp  accounts  to  a  bank, 

should  a  purchaser  refuse  to  accept  trade  paper. 


336 


Bank  and  Trade  Acceptances 


Form  No.  10  b,  accompanies  the  bill,  and  in  the  event  of  "refusal  to 
sign"  by  the  customer,  the  reason  for  such  refusal  is  required  to  be 
indicated  thereon. 

Form  No.  10  c,  is  at  times  necessary  in  view  of  the  fact  that  goods 
might  arrive  subsequent  to  the  time  of  presentation  of  the  bill  for 
acceptance.  The  necessity  of  this  mode  of  procedure  arises  mostly  in 
foreign  trade  transactions,  where  the  "acceptor"  is  not  inclined  to 
obligate  himself  to  pay  at  a  future  date  with  the  possibility  of  the 
goods  not  arriving. 

FORM  NO.  11 
Banker's  Acceptance 


"I 


\-y^L^       T(rf*--i^ 


SityjCi^(2yr^M.t.x^:^.A*^£^ 


!>»Jb  ^AjL^J^a< 


.^NATIONAL  CITY  BANK  OF  NEW  YORK 
NEW  YORK  CITY 


O^^^^'V^^gg^i^ 


'^'o-A-^i^l^ 


^3^      It 


J5FECIMEN  BILL  DRAWN  LOCALLY 

Specimen  Bill  Drawn  Locally  '':  : 

EXPLANATION— FORM  NO.  11. 
Form  of  Bank  Acceptance — Specimen  Bill  Drawn  Locally 

As  will  be  seen  from  an  examination  of  the  particulars  contained  in 
the  acceptance,  the  purchaser,  having  arranged  with  his  bank  to  have 
them  accept  drafts  drawn  upon  them  by  the  seller,  the  bank,  in  con- 
formity with  this  acceptance  agreement  between  itself  and  the  pur- 
chaser, accepts  such  drafts  drawn  on  it  by  the  seller.  After  accept- 
ance the  draft  becomes  a  "bank  acceptance."  The  bank  acceptance 
is  a  very  high  form  of  commercial  paper  and  usually  has  a  much  bet-, 
ter  credit  and  commercial  standing  than  the  trade  acceptance. 


Commercial  Banking  and  Cpzdits 


337 


FORM  NO.  12 
Bank  Acceptance  Arising  out  of  a  Foreign  Transaction 


W:9Uii^ 


'^yO^^axM^Jae^ 


.Pjwjniunder  creditllvC.  B^  J.^ff  ^/<-^O^L^C/^^'<-'ljt' 


<^e€l^<. 


SPECIMEN  BILL  DRAWN  IN  FOREIGN  COUNTRT 


Specimen  Bill  Drawn  in  a  Foreign  Country 


EXPLANATION— FORM   NO.   12 


Bank  Acceptance — Specimen  Bill  Drawoi  in  Foreign  Country 

This  form  differs  from  form  No.  11  only  in  that  the  drawer  is  domi- 
ciled in  a  foreign  country  instead  of  in  the  United  States.  This  form 
of  bank  acceptance  arises  also  from  an  agreement  between  llie  bank 
and  the  purchaser,  whereby  the  bank  agrees  to  accej)t  drafts  drawn 
upon  it  up  to  a  stipulated  amount,  by  the  shippers  of  goods  abroad. 
Generally,  the  purchasers  agree  to  supply  the  bank  with  funds  with 
which  to  meet  the  draft  at  maturity. 


338  Bank  and  Trade  Acceptances 


FORM  NO.  13 

Forms  of  Certificates  Used  to  Indicate  Eligibility  of  Bankers'  Accpt- 
ances  for  Rediscount  with  the  Federal  Reserve  Banks 


EXPORT  OR  IMPORT  BILL 

This  acceptance  is  based  upon  a  transaction  involving  the  exporta- 
tion or  the  importation  of  merchandise. 


Name  of  Acceptor. 
DOMESTIC  SHIPMENT  BILL 


At  the  time  of  acceptance,  this  bill  was  secured  by  shipping  docu- 
ments evidencing  the  domestic  shipment  of  goods  against  which  it  was 
drawn. 


Name  of  Acceptor. 
WAREHOUSE  BILL 


At  the  time  of  acceptance,  this  bill  was  secured  by  documents  con- 
veying or  securing  title,  covering  readily  marketable  staples  stored  in 
the  United  States. 


Name  of  Acceptor. 

The  above  forms  are  employed  and  illustrated  in  the  three  following 
bank  acceptances. 

EXPLANATION— FORM  NO.  13 

Forms  of  certificates  to  be  affixed  by  rubber  stamps  or  in  typewrit- 
ing by  a  State  bank,  banker,  or  a  trust  company,  for  the  purpose  of 
showing  that  an  acceptance  is  eligible  for  rediscount  with  the  Federal 
Reserve  Banks.  These  forms  are  employed  and  illustrated  in  the 
three  bank  acceptances  following. 


Commercial  Banking  and  Credits 


339 


FORM  NO.  14 

Specimen  of  Bank  Acceptance  Arising  out  of  a  Transaction  Involving 
the  Exportation  or  Importation  of  Goods 


^  APrll  avth. y/.Q/3. 


EXPLANATION— FORM   NO.   14 

The  form  of  certificate  to  the  left  is  one  of  the  three  given  in  No.  13, 
and  is  here  shown  as  it  would  appear  on  a  bank  acceptance.  Under 
the  Federal  Reserve  Act,  an  acceptance  to  be  eligible  for  rediscount, 
must  arise  out  of  a  transaction  involving  the  exportation  or  importa- 
tion of  goods,  a  domestic  shipment  bill,  or  a  warehouse  receipt.  This 
draft  falls  within  the  first  class  of  acceptances  eligible  for  rediscount 
with  the  Federal  Reserve  Banks. 


340 


Bank  and  Trade  Acceptances 


FORM  NO.  15 

Bank  Acceptance  Arising  out  of  a  Transaction  Involving  the  Domestic 

Shipment  of  Goods 


EXPLANATION— NO.  15 


This  bank  acceptance  differs  from  No.  14  only  in  the  form  of  certif- 
icate indicating  its  origin.  In  No.  14,  the  bank  acceptance  is  based 
upon  a  transaction  or  transactions  involving  the  importation  or  the 
exportation  of  goods.  The  acceptance  illustrated  to  the  left  is  one 
"evidencing  the  domestic  shipment  against  which  it  was  drawn." 
When  this  certificate  is  affixed  by  the  bank,  banker  or  trust  company 
to  the  instrument,  it  becomes  a  bank  acceptance  eligible  for  rediscount 
with  the  Federal  Reserve  Banks.  It  is  assumed  that  the  transaction 
is  bona  fide  and  as  stated  and  that  the  drafts  conform  in  all  other 
respects  to  the  rules  and  regulations  of  the  Federal  Reserve  Board. 


Commercial  Banking  and  Cpedits 


341 


FORM  NO.  16 

Form  of  Bank  Acceptance  Based  upon  a  Transaction  Involving 

Warehouse  Receipts 


groTldenae.  R.   I..  Itoy  t,  1915 


Jinaty  (80) 


.Xi^auiM^4fr± 


ftt* 


^w/?/D^ 


^raelvea 


j'ea  Twenty-two   and  63/100 


Kf 


^^    The  Anerl-oaa  ^oheaage  national  Bank, 


^/^■<^n/rVXt  balea  of 

ootton  <aarkoa  SDB. 
BA  April  80.   UH 


aPKp 
Bewjfortf  City 


MJ^33>^ 


»Ay*BLC   Jff  TMC    AMtHICAN  tXCHAMOC-NATlOMAL   B^kNK.NIW    VONK. 


EXPLANATION— FORM  NO.  16 

To  the  left  is  a  form  of  Bank  acceptance  based  upon  a  transaction 
involving  warehouse  receipts.  Note  that  the  form  here  is  dilYcrent, 
though  the  purpose  and  idea  are  the  same  as  in  the  bank  acceptances 
illustrated  in  Nos.  14  and  15  preceding.  As  a  time  saver,  this  form  is 
undoubtedly  the  better  of  the  three,  and  can  moreover  be  used  for  any 
of  the  three  purposes  described.  An  acceptance  of  this  class  is  eligi- 
ble for  rediscount  with  the  Federal  Reserve  Banks. 


342  Bank  and  Trade  ActEtTANCES 

FORM  NO.  17 

COMMERCIAL  DOMESTIC  ACCEPTANCE  AGREEMENT  (a) 

Giving  Rise  to  Bankers'  Acceptances 


For  and  in  consideration  of  the  acceptance  by  Trust 

Company/Bank  of  my/our  draft  on  it  numbered 

dated payable for 

Dollars 

($ ),  and  all  other  drafts  which  may  hereafter  be  ac- 
cepted by  the Trust  Company/Bank  at  my/our 

request,  I/We  hereby  agree  to  place  said  Trust  Company/ 
Bank  in  possession  of  sufficient  funds  in  cash  previous  to  the 
maturity  of  said  draft,  and  of  any  other  drafts  which  said  Trust 
Company/Bank  may  hereafter  from  time  to  time  accept,  to 
meet  the  maturity  of  said  draft  or  drafts  respectively,  together  with 
commission  and  interest  as  agreed. 

I/We  also  assume  all  responsibility  of,  and  said  obligation  to 
place  said  Trust  Company/Bank  in  funds  shall  not  be  affected  or 
impaired  by,  any  risk  or  error  in  the  course  of  transmission  of 
telegrams  and  cablegrams  or  the  loss  of  letters  or  other  docu- 
ments which  may  be  sent  in  connection  with  the  said  drafts. 

In  the  event  of  my/our  suspension,  failure  or  assignment  for 
the  benefit  of  creditors,  or  of  a  petition  in  bankruptcy  being  filed 
against  me/us,  or  the  non-fulfillment  of  any  obligation  here- 
under on  my/our  part  to  be  performed,  all  obligations  and  liabil- 
ties  to  said  Trust  Company/Bank  on  my/our  part  shall  imme- 
diately, without  notice,  accrue  and  mature,  and  become  due  and 
payable,  and  it  is  also  agreed  that  in  any  of  those  events,  the 
said  Trust  Company/Bank  may  take  such  action  with  respect  to 
the  collection  of  any  or  all  of  said  drafts  as  it  may  deem  advisa- 
ble to  protect  its  interests  and  I/We  hereby  agree  to  indemnify 
and  save  said  Trust  Company/Bank  harmless  from  any  loss, 
costs,  damage,  expense  (including  reasonable  attorneys'  fees), 
suffered  or  incurred  by  reason  of  such  action  or  by  reason  of 
my /our  failure  to  perform  any  of  the  obligations  arising  here- 
under. 

This  obligation  shall  continue  in  force  and  remain  applicable 
notwithstanding  any  change  in  the  individuals  comprising  our 
firm,  whether  such  change  shall  arise  from  the  ascession  of  one 
or  more  new  partners  or  from  the  death,  retirement  or  succes- 
sion of  any  partner  or  partners. 

All  rights  arising  under  this  agreement  shall  be  determined 
according  to  the  laws  of  the  State  of 

(L.  S.). 


Commercial  Banking  and  Credits  343 


EXPLANATION— FORM   NO.   17 
Herewith  is  Given  a  Form  of  Acceptance  Agreement 

Here,  a  purchaser,  through  arrangement  with  his  bank,  may  have 
the  seller  draw  his  draft  on  the  latter  and  accepted  by  such  bank, 
instead  of  by  himself.  As  the  transaction  is  one  to  be  carried  out 
entirely  within  the  United  States,  it  is  called  a  Commercial  Domes- 
tic Acceptance  Credit. 

This  is  the  usual  acceptance  agreement  between  the  customer  and 
the  bank,  whereby  the  bank  undertakes  to  accept  drafts  which  may 
be  drawn  upon  it  by  the  seller,  on  behalf  of  the  buyer,  the  latter  under- 
taking to  supply  the  bank  (acceptor)  with  funds  with  which  to  meet 
the  drafts  as  they  fall  due. 


344  Bank  and  Trade  Acceptances 

FORM  NO.  18 
ACCEPTANCE  AGREEMENT 

Used  in  Connection  with  Acceptance  Credits  Granted  by  a  Bank  for 
the  Purpose  of  Financing  Imports  or  Exports  to  or  from  the 
United  States,  or  Merchandise  Stored  in  Warehouses 
in  the  United  States  or  Abroad  while  await- 
ing  shipments  to  this  or  another 
country 

(Front) 

For  and  in  consideration  of  the  acceptance  by  GUARANTY  TRUST 
COMPANY   OF   NEW   YORK,   of   my/our  draft   on   it  numbered 

dated payable for 

Dollars  ($ ),  and  all  other  drafts  which  may  hereafter  be 

accepted  by  the  Guaranty  Trust  Company  of  New  York  at  my/our 
request,  I/we  hereby  deposit  and  assign  and  transfer  to  said  Trust 
Company  as  collateral  security  for  the  payment  of  said  drafts  at 
maturity,  as  well  as  for  the  payment  of  any  and  every  debt  or  liability 
of  every  nature  from  the  undersigned  to  said  Trust  Company. 


with  such  additional  collaterals  as  may  from  time  to  time  be  required 
by  any  of  the  officers  of  said  Trust  Company,  and  which  the  under- 
signed hereby  promises  to  furnish  on  demand.  And  the  undersigned 
hereby  gives  to  said  Trust  Company,  or  its  assigns,  full  power  to  sell, 
assign  and  deliver  the  whole  or  any  part  of  said  collaterals,  or  any  sub- 
stitutes therefor,  or  any  additions  thereto,  at  any  Brokers'  Exchange 
or  elsewhere  at  pubHc  or  private  sale,  at  the  option  of  such  holder, 
on  the  non-performance  of  any  of  the  promises  herein  contained,  and 
without  notice  of  amount  due  or  claimed  to  be  due,  without  demand 
of  payment,  without  advertisement  and  without  notice  of  the  time  or 
place  of  sale,  each  and  every  of  which  is  hereby  expressly  waived ; 
and  on  any  such  sale  the  Trust  Company,  its  assigns  or  any  of  the 
officers  of  said  Trust  Company,  may  purchase  on  its  own  account  and 
without  further  accountability  except  for  the  purchase  price  thereof  the 
whole  or  any  part  of  the  property  sold  free  from  any  right  of  redemp- 
tion on  the  part  of  the  undersigned,  which  right  is  hereby  waived  and 
released. 

It  is  further  agreed,  that  any  surplus  arising  from  the  sale  of  said 
collaterals,  beyond  the  amount  due  hereon,  shall  be  applicable  upon 
any  claim  of  the  said  Trust  Company  arising  directly  or  by  assign- 


Commercial  Banking  and  Cejedits  345 

ment  against  the  undersigned  at  the  time  of  said  sale,  whether  the 
same  be  then  due  or  not  due. 

And  it  is  further  agreed  that  any  moneys  or  properties,  at  any  time, 
in  the  possession  of  GUARATY  TRUST  COMPANY  OF  NEW 
YORK  belonging  to  any  of  the  parties  liable  hereon  to  said  Trust 
Company,  and  any  deposits,  balance  of  deposits  or  other  sum  at  any 
time  credited  by  or  due  from  said  Trust  Company  to  any  of  said  par- 
ties, shall  at  all  times  be  held  and  treated  as  collateral  security  for  the 
payment  of  any  other  obligation,  indebtedness  or  liability  of  the  under- 
signed to  the  said  Trust  Company,  whether  due  or  not  due,  and  said 
Trust  Company  may  at  any  time,  at  its  option,  set  off  the  amount  due 
or  to  become  due  hereon  or  any  other  obligations  against  any  claim  of 
any  of  said  parties  against  said  Trust  Company. 

And  I/we  also  agree  to  place  said  Trust  Company  in  possession  of 
sufficient  funds  in  cash  previous  to  the  maturity  of  said  draft,  and  of 
any  other  drafts  which  the  said  Trust  Company  may  hereafter  from 
time  to  time  accept  to  meet  the  maturity  of  said  draft  or  drafts  respec- 
tively, together  with  commission  as  agreed  and  any  interest  which 
may  accrue  thereon,  calculated  at  the  rate  of  six  per  cent  (6%)  per 
annum.  Any  and  all  drafts  or  bills  of  exchange  now  or  hereafter  de- 
livered by  me/us  to  said  Trust  Company  to  be  collected  shall  be  deliv- 
ered to  and  received  by  it  as  security  for  said  acceptance  or  accept- 
ances without  impairing  in  any  way  my/our  obligation  hereunder  to 
place  said  Trust  Company  in  funds  before  the  maturity  of  said  accept- 
ance or  acceptances  as  aforesaid,  and  all  documents  relating  to  such 
bills  for  collection  shall  likewise  be  held  and  received  by  said  Trust 
Company  as  security  with  the  privilege  of  delivering  same  to  drawees 
upon  acceptance  or  acceptances  unless  instructions  to  the  contrary 
shall  be  attached  to  each  bill. 

The  said  Trust  Company  shall  have  the  right  to  apply  the  proceeds 
of  such  collections  against  the  payment  of  said  acceptance  or  accept- 
ances and  of  any  other  indebtedness  due  or  to  become  due  from  mc/us. 

It  is  expressly  agreed  that  I/we  assume  all  responsibility  for  the  col- 
lection of  drafts  or  bills  delivered  as  aforesaid  and  for  any  loss,  costs 
or  expenses  suffered  or  incurred  by  said  Trust  Company  in  connec- 
tion therewith,  and  that  said  Trust  Company  shall  l)c  held  free  of 
responsibility  for,  and  my/our  obligation  to  place  said  Trust  Comi)any 
in  funds  as  aforesaid  shall  not  be  affected  or  impaired  by,  any  default, 
neglect,  suspension,  insolvency  or  bankruptcy  of  any  correspondt-iit  or 
sub-agent,  to  whom  said  bills  or  drafts  may  be  entrusted  ior  collec- 
tion or  for  any  delay  in  remittance,  loss  in  exchange,  or  the  loss  of 
the  said  drafts  or  bills  or  their  proceeds  during  transmission  or  in  the 
course  of  their  collection,  and  I/we  expressly  agree  to  assume  ail  re- 
sponsibility for,  and  that  my/our  said  obligation  to  said  Trust  Com- 
pany shall  not  be  affected  or  impaired  by,  the  non-payment  of  any  bills 
of  exchange  which  may  be  received  by  said  Trust  Company  or  by  any 
collecting  bank,  agent  or  sub-agent  in  payment  of  such  drafts  or  bills 
of  exchange. 


346  Bank  and  Trade  Acceptances 

I/we  also  assume  all  responsibility  of,  and  said  obligation  to  place 
said  Trust  Company  in  funds  shall  not  be  affected  or  impaired  by, 
any  risk  or  error  in  the  course  of  transmission  of  telegrams  and  cable- 
grams or  the  loss  of  letters  or  other  documents  which  may  be  sent 
in  connection  with  the  said  drafts  or  bills  for  collection. 

I/we  also  agree  that  in  the  event  that  any  of  the  said  Trust  Com- 
pany's correspondents,  agents  or  sub-agents  for  collection  of  said 
drafts  or  bills  shall  advise  it  that  any  of  said  drafts  or  bills  are  not 
promptly  accepted  or  paid,  or  in  the  event  of  the  suspension,  failure 
or  assignment  for  the  benefit  of  creditors,  or  by  the  filing  of  a  petition 
in  bankruptcy  against  the  drawee  or  the  drawees  of  any  of  said  bills 
for  collection,  that  I/we  will  immediately  upon  receipt  of  such  notice, 
waiving  protest,  and  notice  of  protest,  pay  or  cause  to  be  paid  to  said 
Trust  Company  in  cash  the  face  amount  of  any  such  draft  or  bill  for 
collection  which  has  not  been  accepted  or  the  drawee  of  which  has 
suspended,  failed  or  assigned  or  against  whom  a  petition  in  bank- 
rutpcy  has  been  filed  as  aforesaid. 

In  the  event  of  my /our  suspension,  failure  or  assignment  for  the 
benefit  of  creditors,  or  of  a  petition  in  bankruptcy  being  filed  against 
me/us,  or  the  non-fulfillment  of  any  obligation  hereunder  on  my/our 
part  to  be  performed,  all  obligations  and  liabilities  to  said  Trust  Com- 
pany on  my/our  part  shall  immediately,  without  notice,  accrue  and 
mature  and  become  due  and  payable,  and  it  is  also  agreed  that  in 
either  of  those  events,  said  Trust  Company  may  take  such  action  with 
respect  to  the  collection  of  any  or  all  of  said  drafts  and  bills  delivered 
as  aforesaid  for  collection  as  it  may  deem  advisable  to  protect  its  inter- 
ests, and  I/we  hereby  agree  to  indemnify  and  save  said  Trust  Com- 
pany harmless  from  any  loss,  costs,  damage,  expense  (including  rea- 
sonable attorneys'  fees),  suffered  or  incurred  by  it  by  reason  of  such 
action  or  by  reason  of  my/our  failure  to  perform  any  of  the  obligations 
arising  hereunder. 

This  obligation  shall  continue  in  force  and  remain  applicable  not- 
withstanding any  change  in  the  individuals  comprising  our  firm, 
whether  such  change  shall  arise  from  the  accession  of  one  or  more 
new  partners  or  from  the  death,  retirement  or  succession  of  any  part- 
ner or  partners. 

All  rights  arising  under  this  agreement  shall  be  determined  accord- 
ing to  the  laws  of  the  State  of  New  York. 

•   •••••••••••••••••••       Xt7  •   •  •   • 

(Reverse  side) 

WHEREAS,    

the  undersigned  has/have  requested  the  Guaranty  Trust  Company  of 
New  York  to  accept  the  drafts  mentioned  and  described  in  the  accept- 
ance agreement  of dated  the of 

19 printed  on  the  reverse  side  hereof,  and 

WHEREAS,  the  said  Guaranty  Trust  Company  of  New  York  is 


Commercial  Banking  and  Credits  347 

willing  to  execute  such  acceptances  provided  the  undersigned  will 
unconditionally  guarantee  to  it  the  prompt  payment  at  maturity  of 

the  said  drafts  and  of  any  other  drafts  of  

which  the  said  Trust  Company  may  hereafter  accept  from  time  to 
time. 

NOW,  IN  CONSIDERATION  OF  THE  PREMISES  and  of  the 
sum  of  One  Dollar  to  the  undersigned  in  hand  paid,  the  receipt  whereof 
is  herby  acknowledged,  the  undersigned  do hereby  uncon- 
ditionally guarantee  to  the  said  GUARANTY  TRUST  COMPANY 
OF  NEW  YORK,  its  successors,  endorsees  and  assigns,  the  prompt 
payment  at  maturity  of  any  and  all  drafts  accepted  by  the  GUAR- 
ANTY TRUST  COMPANY  OF  NEW  YORK,  pursuant  to  said 
acceptance  agreement,  and  any  and  all  renewals  and  extensions  there- 
of, the  prompt  performance  by   of  all  the 

terms,  conditions  and  covenants  contained  in  said  acceptance  agree- 
ment, and  the  payment  of  every  debt  and  liability  of 

to  the  Guaranty  Trust  Company  of  New  York. 

The  undersigned  hereby  consents  to  any  renewal  and  extension  of 
time  of  payment  of  any  draft,  drafts  or  other  indebtedness  that  may  be 
granted  by  the  Guaranty  Trust  Company  of  New  York,  and  do  .... 

also  consent  that  the  securities  set  forth  in  said  acceptance 

agreement  may  be  exchanged  or  surrendered  from  time  to  time  with- 
out notice  to,  or  further  assent  from  the  undersigned,  and  that  the 
undersigned  will  remain  bound  upon  this  guarantee  notwithstanding 
such  changes,  surrenders,  renewals  and  extensions. 

The  undersigned  expressly  waives  presentment,  demand  of  pay- 
ment, protest  and  notice  of  dishonor  of  said  drafts  and  acceptances 
thereof,  and  does  also  waive  notice  of  the  nonperformance  on  the  part 

of    of  any  of  the  provisions  or  covenants 

of  the  aforesaid  acceptance  agreement  on  his/its/their  part  to  be  per- 
formed and  notice  of  any  sale  of  the  collateral  securties  aforesaid. 

This  guarantee  is  made  without  any  limitation  as  to  duration  or 

amount,  and  the  undersigned  agree that  it  shall  continue 

and  that  the  said  Guaranty  Trust  Company  of  New  York  may  con- 
tinue to  act  on  the  faith  thereof  to  any  extent  until  such  time  as  the 
said  Trust  Company  shall  receive  from  me/us  written  notice  of  its 
withdrawal ;  which  notice,  however,  shall  not  in  any  wise  affect  any 
draft  and  acceptance  theretofore  made  or  any  other  liability  thereto- 
fore incurred,  whether  then  due  and  payable  or  thereafter  to  become 
due  and  payable,  and  not  fully  paid  at  the  time  of  the  receipt  by  the 
said  Trust  Company  of  said  notice. 

The  undersigned  declares  to  and  covenants  with  the  said  Guaranty 
Trust  Company  of  New  York,  its  successors,  endorsees  and  assigns, 
that  the  undersigned  ha—  no  defense  whatsoever  to  any  action,  suit  or 
proceeding  at  law,  or  otherwise,  that  may  be  instituted  upon  this  guar- 

This  guarantee  shall  be  construed  in  accordance  with  the  laws  of 
the  State  of  New  York. 


348  Bank  and  Trade  Acceptances 

IN  WITNESS  WHEREOF,  the  undersigned  ha—  set  his/our 
hand      and  seal       this day  of  

X«/  •   •  •   • 

(L.S.). 

EXPLANATION— FORM   NO.   18 
Acceptance  Agreement 

Copy  of  an  "acceptance  agreement"  which  is  used  in  connection 
with  acceptance  credits  granted  by  a  bank  for  the  purpose  of  financing 
imports  or  exports  to  or  from  the  United  States,  or  merchandise  stored 
in  warehouses  in  this  country,  or  in  warehouses  in  other  countries, 
while  awaiting  shipment  to  the  United  States,  or  another  country. 

This  form  of  agreement  is  signed  by  the  client  of  the  bank  at  the 
time  the  credit  is  arranged  for. 

There  is  no  material  difference  between  the  operation  of  an  accept- 
ance which  arises  out  of  a  foreign  transaction  and  one  between  commer- 
cial firms  in  this  country,  except  that  in  the  latter,  the  mode  of  payment 
would  be  in  "dollars"  whereas  in  the  former,  it  may  be  made  avail- 
able to  the  drawer  in  the  currency  of  his  locality.  Such  drafts  being 
accepted  by  the  bank,  become  "bank  acceptances"  drawn  in  a  foreign 
country.     (Form  No.  12). 

FORM  NO.  19 
Trust  Receipt  Used  in  Connection  With  Acceptance  Credits 

Received  from  the    TRUST  COMPANY/BANK, 

hereinafter  called  the  TRUST  COMPANY/BANK,  the  following 
goods  and  merchandise,  their  property  specified  in  warehouse  re- 
ceipt/bill of  lading. 

warehouse,    dated    

consignor,  consignee 

goods  described  as  follows : 


In  consideration  thereof  we  hereby  agree  to  hold  said  goods  and 
merchandise  in  trust  for  said  TRUST  COMPANY/BANK  and  as  its 


Commercial  Banking  and  Cpedits  349 

property  and  subject  to  its  order,  and  it  is  understood  and  agreed  that 
the  warehouse  receipt/bill  of  lading  and  the  goods  and  merchandise 
represented  thereby  and  any  other  document  of  title  which  may  be  is- 
sued in  respect  thereof  is  held  by  us  only  as  trustees  for  the  benefit  of 
the  TRUST  COMPANY/BANK,  without  giving  us  any  title  to  the 
goods  and  merchandise  they  represent,  except  as  trustees  for  the  bene- 
fit of  said  TRUST  COMPANY/BANK.  It  is  agreed  that  we  are  to 
have  power  subject  to  the  same  conditions,  to  sell  or  manufacture,  or 
cause  to  be  manufactured,  products  from  such  goods  and  merchandise, 
and  to  sell  such  manufactured  products  for  the  account  of  and  as  trus- 
tees for  said  TRUST  COMPANY/BANK. 

We  further  agree  to  keep  said  property  or  manufactured  products 
thereof  insured  against  fire,  payable  in  case  of  loss  to  the  said  TRUST 
COMPANY/BANK  as  interest  may  appear,  with  the  understanding 
that  it  is  not  to  be  chargeable  for  any  expense  incurred  thereby,  the 
intention  of  the  arrangement  being  to  protect  and  preserve  the  title  of 
the  TRUST  COMPANY/BANK  to  the  goods  or  proceeds  thereof 

without  expense. 

Signed   


EXPLANATION— FORM   NO.   19 

Trust  Receipt 

Form  to  be  signed  and  returned  to  bank  by  purchaser  or  party  in 
whose  behalf  bank  has  accepted.  The  purpose  of  the  "trust  receipt" 
in  "bank  acceptances"  is  to  give  to  the  purchaser,  upon  his  signing  the 
"trust  receipt"  possession  or  right  to  possession  of  the  goods  covered 
by  it,  governed  by  limitations  as  to  mode  of  payment,  guaranty,  secu- 
rity, etc.,  to  be  given  by  the  "purchaser"  to  the  bank.  Trust  receipts 
are  sometimes  accepted  as  temporary  collateral  from  responsible  par- 
ties in  exchange  for  shipping  documents  or  warehouse  receipts.  They 
are  also  used  in  connection  with  Import  and  Export  Letters  of  Credit 
and  loans. 


350  Bank  and  Trade  Acceptances 

FORM  NO.  20 

Trust  Receipt  Used  in  Connection  With  Acceptance  Credits 

Received  from  River  National  Bank  of  St.  Louis  the  following 
goods  and  merchandise,  their  property,  specified  in  the  Bill  of  Lading 
per R.  R.,  Dated marked  and  num- 
bered as  follows: 


and,  in  consideration  thereof,  WE  HERBY  AGREE  TO  HOLD 
SAID  GOODS  IN  TRUST  for  them,  and  as  their  property,  with  lib- 
erty to  sell  the  same  for  their  account,  and  further  agree,  in  case  of 
sale,  to  hand  the  proceeds  to  them  to  apply  against  the  acceptances  of 
River  National  Bank  of  St.  Louis  on  our  account,  under  the  terms 
of  the  Letter  Credit  No for  our  account  and  for  the  pay- 
ment of  any  other  indebtedness  of  ours  to  River  National  Bank  of  St. 
Louis. 

The  River  National  Bank  of  St.  Louis,  may  at  any  time  cancel  this 
trust  and  take  possession  of  said  goods,  or  of  the  proceeds  of  such  of 
the  same  as  may  then  have  been  sold,  wherever  the  said  go©ds  or 
proceeds  may  then  be  found  and  in  the  event  of  any  suspension,  or 
failure,  or  assignment  for  the  benefit  of  creditors,  on  our  part,  or  of  the 
non-fulfillment  of  any  obligation,  or  of  the  non-payment  at  maturity 
of  any  acceptance  made  by  us  under  said  credit,  or  under  any  other 
credit  issued  by  River  National  Bank  of  St.  Louis,  on  our  account 
or  of  any  indebtedness  on  our  part  to  them,  all  obligations,  accept- 
ances, indebtedness  and  liabilities  whatsoever  shall  thereupon  (with 
or  without  notice)  mature  and  become  due  and  payable.  The  said 
goods  while  in  our  hands  shall  be  fully  insured  against  loss  by  fire. 


Dated,  New  York  City 19. 


(Signed) 


$. 


Commercial  Banking  and  Cp£Dits  351 


EXPLANATION— FORM   NO.  20 

Trust  Receipt 

This  form  of  trust  receipt  is  used  for  the  same  purposes  as  that  in 
No.  19.     The  only  difference  between  the  two  is  in  the  wording. 


352  Bank  and  Trade  Acceptances 

FORM  NO.  21 

Trust   Receipt 


(DOCUMENTS  FOR  WAREHOUSING) 


RECEIVED  from  The  Guaranty  Trust  Co.  of  New  York  Bill  of 

Lading  per dated for  the 

following  goods  and  merchandise,  their  property,  marked  and  num- 
bered as  follows: 


imported  under  the  terms  of  Letter  of  Credit  No , 

issued  by  them  for  my/our  account  the  said  Bill  of  Lading  to  be  used 
by  me/us  for  the  sole  purpose  of  entering  the  above  described  property 

at  the  United  States  Custom  House  at  the  Port  of 

and  of  storing  the  sam.e  in  the  name,  and  as  the 

property,  of  the  said  The  Guaranty  Trust  Co.  of  New  York,  and  sub- 
ject only  to  their  order,  I/we  hereby  agreeing  to  so  store  the  said 
property  and  to  hand  the  storage  receipt  for  the  same  to  the  said 
The  Guaranty  Trust  Co.  of  New  York,  when  obtained. 

I/we  ALSO  AGREE  to  fully  insure  said  property  against  fire, 
the  loss,  if  any,  payable  to  said  The  Guaranty  Trust  Co.  of  New  York, 
and  to  hand  to  them  the  policies  of  insurance  thereon. 


Dated 19. 


(Signed) 


Commercial  Banking  and  Cpzdits  353 


EXPLANATION— FORM   NO.   21 

Trust  Receipt 

(DOCUMENTS    FOR   WAREHOUSING) 

This  form  of  Trust  Receipt  is  also  used  in  connection  with  Import 
Letters  of  Credit,  and  it  is  temporarily  accepted  against  the  surrender 
of  shipping  documents  in  order  that  the  goods  covered  by  such  doc- 
uments may  be  placed  in  warehouse,  and  pending  the  delivery  of  the 
warehouse  receipt. 

This  form  of  Trust  Receipt  is  used  covering  the  delivery  of  mer- 
chandise actually  sold,  the  relative  shipping  documents  being  surrend- 
ered to  the  client  against  his  trust  receipt  in  order  to  enable  him  to 
make  delivery  to  the  buyer. 


354  Bank  and  Trade  Acceptances 


FORM  NO.  22 
Trust  Receipt  for  Withdrawal  of  Collaterals 

Trust  Receipt  for  Withdrawal  of  Collaterals 

Loan  of New  York, 

Received  from  Guaranty  Trust  Co.  of  New  York,  the  following  prop- 
erty held  by  the  Guaranty  Trust  Co.  of  New  York,  as  collateral  se- 
curity: 


and  in  consideration  thereof  we/I  hereby  agree,  acting  as  agents  for 
the  Guaranty  Trust  Co.  of  New  York,  in  this  matter,  to  hold  said 
property  in  trust,  for  the  following  purposes  only,  viz : 


with  the  understanding  that  we/  I  will  hand  the 


as  soon  as  received  to  the  Guaranty  Trust  Co.  of  New  York,  the  inten- 
tion of  this  agreement  being  to  protect  and  preserve  unimpaired  the 
lien  of  the  Guaranty  Trust  Co.  of  New  York,  on  said  property. 


Commercial  Banking  and  Cpzdits  355 


EXPLANATION— FORM   NO.  22 

The  "Trust  Receipt  for  Withdrawal  of  Collaterals"  illustrated  at  the 
left,  upon  its  being  signed  and  returned  to  the  bank,  passes  possession 
or  right  to  possession  of  the  goods,  to  the  signatory,  the  latter  at  the 
same  time  recognizing  the  lien  of  the  bank  on  said  property. 


35^  Bank  and  Trade  Acceptances 

FORM  NO.  23 

Bailee  Receipt 

RECEIVED  from  the  GUARANTY  TRUST  COMPANY  OF 
NEW  YORK  solely  for  the  purpose  of  selling  same  for  account  of 
said  Company: 


marked  and  numbered 

and hereby  undertake  to  sell  the  property  herein  speci- 
fied, for  account  of  the  said  Company,  and  collect  the  proceeds  of  the 
sale  or  sales  thereof,  and  deliver  the  same  immediately  on  receipt 
thereof  to  the  said  Company,  to  be  applied  to  the  credit  of 

hereby  acknowledging to  be  Bailee  of  the 

said  property  for  the  said  Company,  and   

do  hereby  assign  and  transfer  to  the  said  Company  the  accounts  of 
the  purchaser  or  purchasers  of  said  property  to  the  extent  of  the  pur- 
chase price  thereof,  of  which  fact  notice  shall  be  given  at  the  time  of 

delivery  of  the  said  property  by to  such  purchaser 

or  purchasers  and  all  invoices  therefor  shall  have  imprinted,  written 
or  stamped  thereon  by the  following : 

"Transferred  and  payable  to  GUARANTY  TRUST  COMPANY 
OF  NEW  YORK,  140  Broadway,  New  York." 

If  the  said  property  is  not  sold  and  the  proceeds  so  deposited  within 
ten  days  from  this  date, undertake  to  return  all  doc- 
uments at  once  on  demand,  or  to  pay  the  value  of  the  goods,  at  the 
Company's  option. 

The  said  goods  while  in  my/our  hands  shall  be  fully  insured  against 
loss  by  fire. 

The  terms  of  this  receipt  and  agreement  shall  continue  and  apply  to 
the  merchandise  above  referred  to  whether  or  not  control  of  the  same, 
or  any  part  thereof,  be  at  any  time  restored  to  the  Guaranty  Trust 
Company  of  New  York,  and  subsequently  delivered  to  us. 

Dated  at  New  York  City, 19 


Commercial  Banking  and  Cpzdits  357 


EXPLANATION— FORM  NO.  23 

Bailee   Receipt 

This  form  of  receipt  is  very  specific  as  to  the  terms  and  conditions 
under  which  possession  of  merchandise  is  obtained. 


3S8 


Bank  and  Trade  Acceptances 


e 
Z 

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Commercial  Banking  and  Ckzdits  359 


EXPLANATION— FORM  NO.  24 

Form  of  Record  Book  for  Acceptances,  Drafts,  Bills,  Notes,  etc. 

The  Trade  Acceptance  accompanies  the  invoice  and  is  sent  to  the 
purchaser,  who  accepts  same.  At  the  time  it  is  sent  to  such  pur- 
chaser a  record  is  taken  of  the  sale  by  a  proper  entry  in  the  sales 
book,  as  in  the  "open  account  method."  The  acceptance  when  re- 
turned to  the  seller  is  then  entered  in  the  "acceptance  register"  from 
where  it  may  be  posted  to  the  ledger  to  offset  the  outstanding  in- 
debtedness of  the  customer.  Some  firms  treat  the  acceptance  as  an 
entire  cancellation  of  the  debt;  others  merely  as  a  matter  of  record. 


PART  V 

BANK  AND  TRADE  ACCEPTANCES 
COMMERCIAL  BANKING  AND  CREDITS 


LAWS 


The  Negotiable  Instruments  Law,  Digest  of  the  Federal  Bill  of  Lading 

Law,  The  United  States  Warehouse  Act,  Laws  Relating  to  the 

Taxation  of  Negotiable  Instruments,  Checks,  Drafts,   Bank 

and  Trade  Acceptances,  and  Promissory  Notes 


THE 

NEGOTIABLE  INSTRUMENTS 

LAW 

The  purpose  of  which  is  to  make  uniform  throughout  the  United 
States  the  law  relating  to  negotiable  commercial  paper. 


PRELUDE  TO  THE  NEGOTIABLE  INSTRUMENTS  LAW 

The  Negotiable  Instruments  Law  was  codified  and  approved  by- 
several  States  in  the  Union  in  the  year  1897,  and  was  adopted 
in  whole  or  in  part,  within  the  few  following  years  by  a  majority  of 
the  States.  In  the  few  jurisdictions  of  the  United  States  where  the 
Negotiable  Instruments  Law  has  not  been  passed,  the  law  relating  to 
bills,  notes  and  checks  is  based  on  the  principles  of  the  common  law, 
which  is  a  series  of  rules  and  precedents  originating  in  the  Courts 
of  England  and  the  United  States,  and  which  were  decided  during  the 
past  few  centuries  on  questions  as  they  arose  from  time  to  time. 

The  Negotiable  Instruments  Law  in  such  States  in  which  it  was 
passed,  does  not  abolish  the  entire  system  of  common  law  governing 
bills,  notes  and  checks,  but  only  restates  the  rules  of  the  common 
law  which  existed  prior  to  the  enactment  of  the  Statute.  The  com- 
mon law,  where  it  conflicts  with  the  Statute  Law,  gives  precedence  to 
the  latter,  though  the  common  law  still  remains  important  due  to  the 
fact  that  cases  frequently  arise  which  are  not  clearly  covered  by  the 
Statutes. 

This  particular  point  is  clearly  outlined  in  Section  196  of  the  Law 
of  Negotiable  Instruments  which  provides  that  in  cases  not  provided 
for  by  the  Statute,  the  unwritten  law  prevails. 

Below  is  given  a  list  of  the  States  and  territories  which  have  adopted 
the  Negotiable  Instruments  Law  in  whole  or  in  great  part. 

For  any  variation,  reference  must  be  made  to  the  Statute  of  that  par- 
ticular State. 

LIST  OF  STATES  AND  TERRITORIES  IN  WHICH  THE 
NEGOTIABLE  INSTRUMENTS  LAW  HAS  BEEN 

ADOPTED 

Alabama.     Laws  of  1907,  No.  722,  p.  6G0.     In  effect  January  1.  1908. 
Arizona.     Rev.  St.  1901,  p.  852;    Laws  1905,  Ch.  23.     In  effect  Sep- 
tember 1,  1901. 
Arkansas.     Laws  of  1913,  Act  81.     In  effect  April  22.  1913. 
Colorado.     Laws  of  1897,  Ch.  HI.     Approved  April  20,  1897. 

363 


364  Bank  and  Trade  Acceptances 

Connecticut.     Laws  of  1897,  Ch.  74.    Approved  April  5,  1897. 
Delaware.     Laws  of  1911,  Ch.  191.     In  effect  January  1,  1912. 
District  of  Columbia.     Laws  of  1899,  Chap.  47 ;  30  U.  S.  Stat,  at  L.,  p. 

785.     In  effect  April  3,  1899. 
Florida.     Laws  of  1897,  Chap.  4524.    Approved  June  1,  1897. 
Hawaii.       Laws  of  1907,  Act   89.     In  effect  April  20,  1907. 
Idaho.     Laws  of  1903,  p.  380.     In  effect  March  10,  1903. 
Illinois.     Laws  of  1907,  p.  403.     Approved  June  5,  1907. 
Indiana.     Laws  of  1913,  Chap.  63.     Approved  March  3,  1913. 
Iowa.     Laws  of  1902,  Chap.  130 ;   Laws  of  1906,  Chap.  149.  Approved 

April  12,  1902. 
Kansas.     Laws  of  1905,  Chap.  310.     In  effect  June  8,  1905. 
Kentucky.     Laws  of  1904,  Chap.  102.     Approved  March  24,  1904. 
Louisiana.     Laws  of  1904,  Act  64.     Approved  June  29,  1904. 
Maryland.     Laws  of  1898,  Chap.  119.     Approved  March  29,  1898. 
Massachusetts.     Laws  of  1898,  Chap.  533;    Laws  of  1899,  Chap.  130. 

In  effect  January  1,  1899. 
Michigan.     Laws  of  1905,  Chap.  265,  p.  389.     Approved  June  16,  1905. 
Minnesota.     Laws  of  1913,  Chap.  272.     In  effect  July  1,  1913. 
Missouri.     Laws  of  1905,  p.  243.     Approved  April  10,  1905. 
Montana.     Laws  of  1903,  Chap.  121.     In  effect  March  7,  1903. 
Nebraska.     Laws  of  1905,  Chap.  83.     In  effect  August  1,  1905. 
Nevada.     Laws  of  1907,  Chap.  62.     In  effect  May  1,  1907. 
New  Hampshire.     Laws  of  1909,  Chap.  123.     In  effect  January  1,  1910. 
New  Jersey.     Laws  of  1902,  Chap.  184.     Approved  April  4,  1902. 
New  Mexico.     Laws  of  1907,  Chap.  83.     Approved  March  21,  1907. 
New  York.     Laws  of  1897,  Chap.  612;   Laws  of  1898,  Chap.  336.     In 

effect  October  1,  1897. 
North  Carolina.     Laws  of  1899,  Chap.  733;   Laws  of  1905,  Chap.  327; 

Laws  of  1907,  Chap.  897.     In  effect  March  8,  1899. 
North  Dakota.     Laws  of  1899,  Chap.  113.     Approved  March  7,  1899. 
Ohio.     Laws  of  1902,  p.  162.     In  effect  January  1,  1903. 
Oklahoma.     Laws  of  1909,  Chap.  24.     In  effect  June  10,  1909. 
Oregon.     Laws  of  1899,  p.  18.     Approved  February  16,  1899. 
Pennsylvania.     Laws  of  1901,  p.  194.     In  effect  September  2,  1901. 
Rhode  Island.     Laws  of  1899,  Chap.  674.     In  effect  July  1,  1899. 
South  Carolina.     Laws  of  1914,  Act  No.  396,  p.  668.     Vetoed  by  the 

governor  March  4,  1914,  and  passed  by  both  Houses  over  his 

veto. 
South  Dakota.     Laws  of  1913,  Chap.  279.     Approved  March  4,  1913. 


Commercial  Banking  and  Cpedits 


365 


Tennessee.     Laws  of  1899,  Chap.  94.     In  effect  May  16,  1899. 
Utah.     Laws  of  1899,  Chap.  83.     In  effect  July  1,  1899. 
Vermont.     Laws  of  1912,  p.  114.     In  effect  June  1,  1913. 
Virginia.     Laws  of  1898,  Chap.  866.     Approved  March  3,  1898. 
Washington.     Laws  of  1899,  Chap.  149.     In  effect  March  22,  1899. 
West  Virginia.     Laws  of  1907,  Chap.  81.     In  effect  January  1,  1908. 
Wisconsin.     Laws  of  1899,  Chap.  356.     In  effect  May  15,  1899. 
Wyoming.     Laws  of  1905,  Chap.  43.     In  effect  February  15,  1905. 


Article 

I. 

II. 

III. 

IV. 

V. 

VI. 

VII, 

VIII. 

IX. 

X. 

XI. 

XII. 

XIII. 

XIV. 

XV. 

XVI. 

XVII. 

XVIII. 


THE  NEGOTIABLE  INSTRUMENTS  LAW 

Page 

General  provisions 365 

Form  and  interpretation  of  negotiable  instruments. . . .  367 

Consideration 373 

Negotiation   374 

Rights  of  holder   378 

Liabilities  of  parties   380 

Presentment  for  payment   382 

Notice  of  dishonor   386 

Discharge  of  negotiable  instruments   391 

Bills  of  exchange ;   form  and  interpretation   393 

Acceptance  394 

Presentment  for  acceptance   397 

Protest    399 

Acceptance  for  honor  101 

Payment  for  honor  '102 

Bills  in  a  set  404 

Promissory  notes  and  checks  '105 

Notes   given   for   patent   rights   and    for   a   speculative 

consideration    1^^* 


THE  NEGOTIABLE  INSTRUMENTS  LAW 


ARTICLE  I. 

General  Provisions. 

§1.  Short  title. 

§2.  Definitions  and  meaning  of  terms. 
§3.  Person  primarily  liable  on  instrument. 
§4.  Reasonable  time,  what  constitutes. 


366  Bank  and  Trade  Acceptances 

§5.  Time,  how  computed;   when  last  day  falls  on  holiday. 

§6.  Application  of  chapter. 

§7.  Rule  of  law  merchant;  when  governs. 

§1.  Short  title. — This  act  shall  be  known  as  the  Negotiable  Instru- 
ments Law. 

§2.  Definitions  and  meaning  of  terms. — In  this  act,  unless  the  con- 
text otherwise  requires : 

"Acceptance"  means  an  acceptance  completed  by  delivery  or  notifi- 
cation. 

"Action"  includes  counter-claim  and  set-off. 

"Bank"  includes  any  person,  or  association  of  persons  carrying  on 
the  business  of  banking,  whether  incorporated  or  not. 

"Bearer"  means  the  person  in  possession  of  a  bill  or  note  which  is 
payable  to  bearer. 

"Bill"  means  bill  of  exchange,  and  "note"  means  negotiable  promis- 
sory note. 

"Delivery"  means  transfer  of  possession,  actual  or  constructive, 
from  one  person  to  another. 

"Holder"  means  the  payee  or  indorsee  of  a  bill  or  note,  who  is  in  pos- 
session of  it,  or  the  bearer  thereof. 

"Indorsement"  means  an  indorsement  completed  by  delivery. 

"Instrument"   means  negotiable   instrument. 

"Issue"  means  the  first  delivery  of  the  instrument,  complete  in  form, 
to  a  person  who  takes  it  as  a  holder. 

"Person"  includes  a  body  of  persons,  whether  incorporated  or  not. 

"Value"  means  valuable  consideration. 

"Written"  includes  printed,  and  "writing"  includes  print. 

§3.  Person  primarily  liable  on  instrument. — The  person  "primarily" 
liable  on  an  instrument  is  the  person  who  by  the  terms  of  the  instru- 
ment is  absolutely  required  to  pay  the  same.  All  other  parties  are  "sec- 
ondarily" liable. 

§4.  Reasonable  time,  what  constitutes. — In  determining  what  is  a 
"reasonable  time"  or  an  "unreasonable  time,"  regard  is  to  be  had  to  the 
nature  of  the  instrument,  the  usage  of  trade,  or  business  (if  any)  with 
respect  to  such  instruments,  and  the  facts  of  the  particular  case. 


Commercial  Banking  and  Cp£dits  367 

§5.  Time,  how  computed;  when  last  day  falls  on  holiday. — Where 
the  day,  or  the  last  day,  for  doing  any  act  herein  required  or  permitted 
to  be  done  falls  on  Sunday  or  on  a  holiday,  the  act  may  be  done  on  the 
next  succeeding  secular  or  business  day. 

§6.  AppHcation  of  chapter. — The  provisions  of  this  act  do  not  apply 
to  negotiable  instruments  made  and  delivered  prior  to  the  passage 
hereof. 

§7.  Law  merchant;  when  governs. — In  any  case  not  provided  for  in 
this  act  the  rules  of  the  law  merchant  shall  govern. 

ARTICLE  11. 
Form   and  Interpretation. 

§20.  Form  of  negotiable  instrument. 

§21.  Certainty  as  to  sum ;   what  constitutes. 

§22.  When  promise  is  unconditional. 

§23.  Determinable  future  time;    what  constitutes. 

§24.  Additional  provisions  not  affecting  negotiability. 

§25.  Omissions;    seal;    particular  money. 

§26.  When  payable  on  demand. 

§27.  When  payable  to  order. 

§28.  When  payable  to  bearer. 

§29.  Terms,  when  sufficient. 

§30.  Date,  presumption  as  to. 

§31.  Ante-dated  and  post-dated. 

§32.  When  date  may  be  inserted. 

§33.  Blanks,  when  may  be  filled. 

§34.  Incomplete  instrument  not  delivered. 

§35.  Delivery;    when  effectual;    when  presumed. 

§36.  Construction  where  instrument  is  ambiguous. 

§37.  Liability  of  person  signing  in  trade  or  assumed  name. 

§38.  Signature  by  agent;    authority;    how  shown 

§39.  Liability  of  person  signing  as  agent,  ct  cetera. 

§40.  Signature  by  procuration;    effect  of. 

§41.  Effect  of  indorsement  by  infant  or  corporation. 

§42.  Forged  signature ;   effect  of. 


368  Bank  and  Trade  Acceptances 

§20.  Form  of  negotiable  instrument. — An  instrument  to  be  nego- 
tiable must  conform  to  the  following  requirements : 

1.  It  must  be  in  writing  and  signed  by  the  maker  or  drawer ; 

2.  Must  contain  an  unconditional  promise  or  order  to  pay  a  sum 
certain  in  money ; 

3.  Must  be  payable  on  demand,  or  at  a  fixed  or  determinable  future 
time ; 

4.  Must  be  payable  to  order  or  to  bearer;   and 

5.  Where  the  instrument  is  addressed  to  a  drawee,  he  must  be  named 
or  otherwise  indicated  therein  with  reasonable  certainty. 

§21.  Certainty  as  to  sum ;  what  constitutes. — The  sum  payable  is  a 
^um  certain  within  the  meaning  of  this  act,  although  it  is  to  be  paid ; 
1.  With  interest ;   or 
.2.  By  stated  instalments ;    or 

3.  By  stated  instalments,  with  a  provision  that  upon  default  in  pay- 
ment of  any  instalment  or  of  interest,  the  whole  shall  become  due ;  or 

4.  With  exchange,  whether  at  a  fixed  rate  or  at  the  current  rate;  or 

5.  With  costs  of  collection  or  an  attorney's  fee,  in  case  payment  shall 
not  be  made  at  maturity. 

§22.  When  promise  is  unconditional. — An  unqualified  order  or 
promise  to  pay  is  unconditional  within  the  meaning  of  this  act,  though 
coupled  with : 

1.  An  indication  of  a  particular  fund  out  of  which  reimbursement  is 
to  be  made,  or  a  particular  account  to  be  debited  with  the  amount ;  or 

2.  A  statement  of  the  transaction  which  gives  rise  to  the  instru- 
ment. 

But  an  order  or  promise  to  pay  out  of  a  particular  fund  is  not  un- 
conditional. 

§23.  Determinable  future  time;  what  constitutes. — An  instrument 
is  payable  at  a  determinable  future  time,  within  the  meaning  of  this 
act,  which  is  expressed  to  be  payable : 

1.  At  a  fixed  period  after  date  or  sight;   or 

2.  On  or  before  a  fixed  or  determinable  future  time  specified  therein ; 

or 

3.  On  or  at  a  fixed  period  after  the  occurrence  of  a  specified  event, 
which  is  certain  to  happen,  though  the  time  of  happening  be  uncer- 
tain. 


CoMMEPCiAL  Banking  \nd  Cpzdits  369 

An  instrument  payable  upon  a  contingency  is  not  negotiable,  and 
the  happening  of  the  event  does  not  cure  the  defect. 

§24.  Additional  provisions  not  affecting  negotiability. — An  instru- 
ment which  contains  an  order  or  promise  to  do  any  act  in  addition  to 
the  payment  of  money  is  not  negotiable  but  the  negotiable  character 
of  an  instrument  otherwise  negotiable  is  not  affected  by  a  provision 
which : 

1.  Authorizes  the  sale  of  collateral  securities  in  case  the  instru- 
ment be  not  paid  at  maturity ;    or 

2.  Authorizes  a  confession  of  judgment  if  the  instrument  be  not  paid 
at  maturity ;  or 

3.  Waives  the  benefit  of  any  law  intended  for  the  advantage  or 
protection  of  the  obligor;    or 

4.  Gives  the  holder  an  election  to  require  something  to  be  done  in 
lieu  of  payment  of  money. 

But  nothing  in  this  section  shall  validate  any  provision  or  stipula- 
tion otherwise  illegal. 

§25.  Omissions;  seal;  particular  money. — The  validity  and  nego- 
tiable character  of  an  instrument  are  not  affected  by  the  fact  that : 

1.  It  is  not  dated  ;   or 

2.  Does  not  specify  the  value  given,  or  that  any  value  has  been 
given  therefor ;  or 

3.  Does  not  specify  the  place  where  it  is  drawn  or  the  place  where  it 
is  payable ;    or 

4.  Bears  a  seal ;    or 

5.  Designates  a  particular  kind  of  current  money  in  whicli  i>aymcnt 

is  to  be  made. 

But  nothing  in  this  section  shall  alter  or  repeal  any  statute  requiring 
in  certain  cases  the  nature  of  the  consideration  to  be  stated  in  the 
instrument. 

§26.  When  payable  on  demand.— :\n  instrument  is  payable  on  de- 
mand : 

1.  Where  it  is  expressed  to  be  payable  on  demand,  or  at  sight,  or  on 

presentation ;   or 

2.  In  which  no  time  for  payment  is  expressed. 

Where  an  instrument  is  issued,  accepted  or  indorsed  when  over- 
due, it  is,  as  regards  the  person  so  issuing,  accepting  or  indc.r.sing  it, 
payable  on  demand. 


370  Bank  and  Trade  Acceptances 

§27.  When  payable  to  order. — The  instrument  is  payable  to  order 
where  it  is  drawn  payable  to  the  order  of  a  specified  person  or  to  him 
or  his  order.     It  may  be  drawn  payable  to  the  order  of; 

1.  A  payee  who  is  not  maker,  drawer  or  drawee;   or 

2.  The  drawer  or  maker;    or 

3.  The  drawee ; 

4.  Two  or  more  payees  jointly;   or 

5.  One  or  some  of  several  payees ;  or 

6.  The  holder  of  an  office  for  the  time  being. 

Where  the  instrument  is  payable  to  order,  the  payee  must  be  named 
or  otherwise  indicated  therein  with  reasonable  certainty. 

§28.  When  payable  to  bearer. — The  instrument  is  payable  to  bearer: 

1.  When  it  is  expressed  to  be  so  payable ;  or 

2.  When  it  is  payable  to  a  person  named  therein  or  bearer;  or 

3.  When  it  is  payable  to  the  order  of  a  fictitious  or  non-existing  per- 
son, and  such  fact  was  known  to  the  person  making  it  so  payable ;  or 

4.  When  the  name  of  the  payee  does  not  purport  to  be  the  name  of 
any  person ;  or 

5.  When  the  only  or  last  indorsement  is  an  indorsement  in  blank. 

§29.  Terms  when  sufficient. — The  instrument  need  not  follow  the 
language  of  this  act,  but  any  terms  are  sufficient  which  clearly  indi- 
cate an  intention  to  conform  to  the  requirements  hereof. 

§30.  Date,  presumption  as  to. — Where  the  instrument  or  an  accept- 
ance or  any  indorsement  thereon  is  dated,  such  date  is  deemed  prima 
facie  to  be  the  true  date  of  the  making,  drawing,  acceptance  or  indorse- 
ment, as  the  case  may  be. 

§31.  Ante-dated  and  post-dated. — The  instrument  is  not  invalid  for 
the  reason  only  that  it  is  ante-dated  or  post-dated,  provided  this  is 
not  done  for  an  illegal  or  fraudulent  purpose.  The  person  to  whom 
an  instrument  so  dated  is  delivered  acquires  the  title  thereto  as  of  the 
date  of  delivery. 

§32.  When  date  may  be  inserted. — Where  an  instrument  expressed 
to  be  payable  at  a  fixed  period  after  date  is  issued  undated,  or  where 
the  acceptance  of  an  instrument  payable  at  a  fixed  period  after  sight 
is  undated,  any  holder  may  insert  therein  the  true  date  of  issue  or  ac- 


Commercial  Banking  and  Cpzdits  371 

ceptance,  and  the  instrument  shall  be  payable  accordingly.  The  in- 
sertion of  a  wrong  date  does  not  avoid  the  instrument  in  the  hands 
of  a  subsequent  holder  in  due  course;  but  as  to  him,  the  date  so 
inserted  is  to  be  regarded  as  the  true  date. 

§33.  Blanks;  when  may  be  filled. — Where  the  instrument  is  want- 
ing in  any  material  particular,  the  person  in  possession  thereof  has 
a  prima  facie  authority  to  complete  it  by  filling  up  the  blanks  therein. 
And  a  signature  on  a  blank  paper  delivered  by  the  person  making  the 
signature  in  order  that  the  paper  may  be  converted  into  a  negotiable 
instrument  operates  as  a  prima  facie  authority  to  fill  it  up  as  such 
for  any  amount.  In  order,  however,  that  any  such  instrument,  when 
completed,  may  be  enforced  against  any  person  who  became  a  party 
thereto  prior  to  its  completion,  it  must  be  filled  up  strictly  in  accord- 
ance with  the  authority  given  and  within  a  reasonable  time.  But  if 
any  such  instrument,  after  completion,  is  negotiated  to  a  holder  in  due 
course,  it  is  valid  and  effectual  for  all  purposes  in  his  hands,  and  he 
may  enforce  it  as  if  it  had  been  filled  up  strictly  in  accordance  with 
the  authority  given  and  within  a  reasonable  time. 

§34.  Incomplete  instrument  not  delivered. — Where  an  incomplete 
instrument  has  not  been  delivered  it  will  not,  if  completed  and  nego- 
tiated, without  authority^  be  a  valid  contract  in  the  hands  of  any 
holder,  as  against  any  person  whose  signature  was  placed  thereon  be- 
fore delivery. 

§35.  Delivery;  when  effectual;  when  presumed. — Every  contract 
on  a  negotiable  instrument  is  incomplete  and  revocable  until  delivery 
of  the  instrument  for  the  purpose  of  giving  effect  thereto.  As  between 
immediate  parties,  and  as  regards  a  remote  party  other  than  a  holder 
in  due  course,  the  delivery,  in  order  to  be  effectual,  must  be  made 
cither  by  or  under  the  authority  of  the  party  making,  drawing,  accept- 
ing or  indorsing,  as  the  case  may  be  ;  and  in  such  case  tlic  delivery 
may  be  shown  to  have  been  conditional,  or  for  a  special  ]nirpose  only, 
and  not  for  the  purpose  of  transferring  the  i)roperty  in  the  instru- 
ment. But  where  the  instrument  is  in  the  hands  of  a  holder  in  due 
course,  a  valid  delivery  thereof  by  all  parties  jirior  to  him  so  as  to 
make  them  liable  to  him  is  conclusively  presumed.  And  where  the 
instrument  is  no  longer  in  the  possession  of  a  party  who.sc  signature 
appears  thereon,  a  valid  and  intentional  delivery  by  him  is  presumed 
until  the  contrary  is  proved. 


372  Bank  and  Trade  Acceptances 

§36.  Construction  where  instrument  is  ambiguous. — Where  the 
language  of  the  instrument  is  ambiguous,  or  there  are  omissions 
therein,  the  following  rules  of  construction  apply : 

1.  Where  the  sum  payable  is  expressed  in  words  and  also  in  figures 
and  there  is  a  discrepancy  between  the  two,  the  sum  denoted  by  the 
words  is  the  sum  payable ;  but  if  the  words  are  ambiguous  or  uncer- 
tain, reference  may  be  had  to  the  figures  to  fix  the  amount ; 

2.  Where  the  instrument  provides  for  the  payment  of  interest, 
without  specifying  the  date  from  which  interest  is  to  run,  the  interest 
runs  from  the  date  of  the  instrument,  and  if  the  instrument  is  un- 
dated, from  the  issue  thereof; 

3.  Where  the  instrument  is  not  dated,  it  will  be  considered  to  be 
dated  as  of  the  time  it  was  issued ; 

4.  W^here  there  is  a  conflict  between  the  written  and  printed  pro- 
visions of  the  instrument,  the  written  provisions  prevail ; 

5.  Where  the  instrument  is  so  ambiguous  that  there  is  doubt 
whether  it  is  a  bill  or  note,  the  holder  may  treat  it  as  either  at  his 
election ; 

6.  Where  a  signature  is  so  placed  upon  the  instrument  that  it  is  not 
clear  in  what  capacity  the  person  making  the  same  intended  to  sign, 
he  is  to  be  deemed  an  indorser; 

7.  Where  an  instrument  containing  the  words  "I  promise  to  pay" 
is  signed  by  two  or  more  persons,  they  are  deemed  to  be  jointly  and 
severally  liable  thereon. 

§37.  Liability  of  person  signing  in  trade  or  assumed  name. — No 
person  is  liable  on  the  instrument  whose  signature  does  not  appear 
thereon,  except  as  herein  otherwise  expressly  provided.  But  one  who 
signs  in  a  trade  or  assumed  name  will  be  liable  to  the  same  extent  as 
if  he  had  signed  in  his  own  name. 

§38.  Signature  by  agent;    authority;    how  shown. — The  signature 

of  any  party  may  be  made  by  a  duly  authorized  agent.  No  particu- 
lar form  of  appointment  is  necessary  for  this  purpose ;  and  the  au- 
thority of  the  agent  may  be  established  as  in  other  cases  of  agency. 

§39.  Liability  of  person  signing  as  agent,  etc. — Where  the  instru- 
ment contains  or  a  person  adds  to  his  signature  words  indicating  that 
he  signs  for  or  on  behalf  of  a  principal,  or  in  a  representative  capacity, 
he  is  not  liable  on  the  instrument  if  he  was  duly  authorized ;   but  the 


Commercial  Banking  and  Cpzdits  373 

mere  addition  of  words  describing  him  as  an  agent,  or  as  filling  a  rep- 
resentative character,  without  disclosing  his  principal,  does  not  ex- 
empt him  from  personal  liability. 

§40.  Signature  by  procuration ;  effect  of. — A  signature  by  "procura- 
tion" operates  as  notice  that  the  agent  has  but  a  limited  authority  to 
sign,  and  the  principal  is  bound  only  in  case  the  agent  in  so  signing 
acted  within  the  actual  limits  of  his  authority. 

§41.  Effect  of  indorsement  by  infant  or  corporation. — The  indorse- 
ment or  assignment  of  the  instrument  by  a  corporation  or  by  an  infant 
passes  the  property  therein,  notwithstanding  that  from  want  of  ca- 
pacity the  corporation  or  infant  may  incur  no  liability  thereon. 

§42.  Forged  signature;  effect  of. — Where  a  signature  is  forged  or 
made  without  authority  of  the  person  whose  signature  it  purports  to 
be,  it  is  wholly  inoperative,  and  no  right  to  retain  the  instrument,  or  to 
give  a  discharge  therefor,  or  to  enforce  payment  thereof  against  any 
party  thereto,  can  be  acquired  through  or  under  such  signature,  unless 
the  party,  against  whom  it  is  sought  to  enforce  such  right,  is  precluded 
from  setting  up  the  forgery  or  want  of  authority. 

ARTICLE  III. 

Consideration  of  Negotiable  Instruments. 

§50.  Presumption  of  consideration. 

§51.  What  constitutes  consideration. 

§52.  What  constitutes  holder  for  value. 

§53.  When  lien  on  instrument  constitutes  holder  for  value. 

§54.  Effect  of  want  of  consideration. 

§55.  Liability  of  accommodation  party. 

§50.  Presumption  of  consideration.— Every  negotiable  instrument 
is  deemed  prinm  facie  to  have  been  issued  for  a  valuable  con.sidcration  ; 
and  every  person  whose  signature  appears  thereon  to  have  become  a 
party  thereto  for  value. 

§51.  Consideration;  what  constitutes.— Value  is  any  consideration 
sufficient  to  support  a  simple  contract.     An  antecedent  or  pre-existing 


374  Bank  and  Trade  Acceptances 

debt  constitutes  value;    and  is  deemed  such  whether  the  instrument 
is  payable  on  demand  or  at  a  future  time. 

§52.  What  constitutes  holder  for  value. — Where  value  has  at  any- 
time been  given  for  the  instrument,  the  holder  is  deemed  a  holder  for 
value  in  respect  to  all  parties  who  became  such  prior  to  that  time. 

§53.  When  lien  on  instrument  constiutes  holder  for  value. — Where 
the  holder  has  a  lien  on  the  instrument,  arising  either  from  contract 
or  by  implication  of  law,  he  is  deemed  a  holder  for  value,  to  the  extent 
of  his  lien. 

§54.  Effect  of  want  of  consideration. — Absence  or  failure  of  consid- 
eration is  matter  of  defense  as  against  any  person  not  a  holder  in  due 
course ;  and  partial  failure  of  consideration  is  a  defense  protanto, 
whether  the  failure  is  an  ascertained  and  liquidated  amount  or  other- 
wise. 

§55.  Liability  of  accommodation  party. — An  accommodation  party 
is  one  who  has  signed  the  instrument  as  maker,  drawer,  acceptor  or 
indorser,  without  receiving  value  therefor,  and  for  the  purpose  of 
lending  his  name  to  some  other  person.  Such  a  person  is  liable  on  the 
instrument  to  a  holder  for  value,  notwithstanding  such  holder  at  the 
time  of  taking  the  instrument  knew  him  to  be  only  an  accommoda- 
tion party. 

ARTICLE   IV. 

Negotiation. 

§60.  What  constitutes  negotiation. 

§61.  Indorsement;   how  made. 

§62.  Indorsement  must  be  of  entire  instrument. 

§63.  Kinds  of  indorsement. 

§64.  Special  indorsement;   indorsement  in  blank. 

§65.  Blank  indorsement;  how  changed  to  special  indorsement. 

§66.  When  indorsement  .restrictive. 

§67.  Effect  of  restrictive  indorsement;   rights  of  indorsee. 

§68.  Qualified  indorsement. 

§69.  Conditional  indorsement. 


Commercial  Banking  and  Cpedits  375 

§70.  Indorsement  of  instrument  payable  to  bearer. 

§71.  Indorsement  where  payable  to  two  or  more  persons. 

§72.  Effect  of  instrument  drawn  or  indorsed  to  a  person  as  cashier. 

§73.  Indorsement  where  name  is  misspelled,  et.  cetera. 

§74.  Indorsement  in  representative  capacity. 

§75.  Time  of  indorsement;   presumption. 

§76.  Place  of  indorsement;   presumption. 

§77,  Continuation  of  negotiable  character. 

§78.  Striking  out  indorsement. 

§79.  Transfer  without  indorsement;    eflFect  of. 

§80.  When  prior  party  may  negotiate  instrument. 

§60.  What  constitutes  negotiaton. — An  instrument  is  negotiated 
when  it  is  transferred  from  one  person  to  another  in  such  manner  as 
to  constitute  the  transferee  the  holder  thereof.  If  payable  to  bearer  it 
is  negotiated  by  delivery,  if  payable  to  order  it  is  negotiated  by  the 
indorsement  of  the  holder  completed  by  delivery. 

§61,  Indorsement;  how  made. — The  indorsement  must  be  written 
on  the  instrument  itself  or  upon  a  paper  attached  thereto.  The  signa- 
ture of  the  indorser,  without  additional  words,  is  a  sufficient  indorse- 
ment. 

§62.  Indorsement  must  be  of  entire  instrument. — The  indorsement 
must  be  an  indorsement  of  the  entire  instrument.  An  indorsement 
which  purports  to  transfer  to  the  indorsee  a  part  only  of  the  amount 
payable,  or  which  purports  to  transfer  the  instrument  to  two  or  more 
indorsees  severally,  does  not  operate  as  a  negotiation  of  the  instru- 
ment. But  where  the  instrument  has  been  paid  in  part,  it  may  be 
indorsed  as  to  the  residue. 

§63.  Kinds  of  indorsement. — An  indorsement  may  be  cither  .special 
or  in  blank;  and  it  may  also  be  cither  restrictive  or  qualified,  or  con- 
ditional. 

§64.  Special  indorsement;  indorsement  in  blank. — A  si)ccial  in- 
dorsement specifies  the  person  to  whom,  or  to  whose  order  the  instru- 
ment is  to  be  payable ;  and  the  indorsement  of  such  indorsee  i.s  neces- 
sary to  the  further  negotiation  of  the  instrument.  An  indorsement 
in  blank  specifies  no  indorsee,  and  an  instrument  so  indorsed  is  i)ay- 
able  to  bearer,  and  may  be  negotiated  by  delivery. 


Z7^  Bank  and  Trade  Acceptances 

§65.  Blank  indorsement;  how  changed  to  special  indorsement. — 
The  holder  may  convert  a  blank  indorsement  into  a  special  indorse- 
ment by  writing  over  the  signature  of  the  indorser  in  blank  any  con- 
tract consistent  with  the  character  of  the  indorsement. 

§66.  When  indorsement  restrictive. — An  indorsement  is  restrictive, 
which  either: 

1.  Prohibits  the  further  negotiation  of  the  instrument;    or 

2.  Constitutes  the  indorsee  the  agent  of  the  indorser ;  or 

3.  Vests  the  title  in  the  indorsee  in  trust  for  or  to  the  use  of  some 
other  person. 

But  the  mere  absence  of  words  implying  power  to  negotiate  does 
not  make  an  indorsement  restrictive. 

§67.  Effect  of  restrictive  indorsement;  rights  of  indorsee. — A  re- 
strictive indorsement  confers  upon  the  indorsee  the  right: 

1.  To  receive  payment  of  the  instrument; 

2.  To  bring  any  action  thereon  that  the  indorser  could  bring; 

3.  To  transfer  his  rights  as  such  indorsee,  where  the  form  of  the  in- 
dorsement authorizes  him  to  do  so. 

But  all  subsequent  indorsees  acquire  only  the  title  of  the  first  in- 
dorsee under  the  restrictive  indorsement. 

§68.  Qualified  indorsement. — A  qualified  indorsement  constitutes 
the  indorser  a  mere  assignor  of  the  title  to  the  instrument.  It  may 
be  made  by  adding  to  the  indorser's  signature  the  words  "without 
recourse"  or  any  words  of  similar  import.  Such  an  indorsement  does 
not  impair  the  negotiable  character  of  the  instrument. 

§69.  Conditional  indorsement. — Where  an  indorsement  is  condi- 
tional a  party  required  to  pay  the  instrument  may  disregard  the  con- 
dition and  make  payment  to  the  indorsee  or  his  transferee,  whether 
the  condition  has  been  fulfilled  or  not.  But  any  person  to  whom 
an  instrument  so  indorsed  is  negotiated  will  hold  the  same,  or  the 
proceeds  thereof,  subject  to  the  rights  of  the  person  indorsing  con- 
ditionally. 

§70.  Indorsement  of  instrument  payable  to  bearer. — Where  an  in- 
strument, payable  to  bearer,  is  indorsed  specially,  it  may  nevertheless 
be  further  negotiated  by  delivery;   but  the  person  indorsing  specially 


Commercial  Banking  and  Cfedits  377 

is  liable  as  indorser  to  only  such  holders  as  make  title  through  his 
indorsement. 

§71.  Indorsement  where  payable  to  two  or  more  persons. — Where 
an  instrument  is  payable  to  the  order  of  two  or  more  payees  or  in- 
dorsees who  are  not  partners,  all  must  indorse,  unless  the  one  indors- 
ing has  authority  to  indorse  for  the  others. 

§72.  Effect  of  instrument  drawn  or  indorsed  to  a  person  as  cashier. — 
Where  an  instrument  is  drawn  or  indorsed  to  a  person  as  "cashier" 
or  other  fiscal  officer  of  a  bank  or  corjX)ration,  it  is  deemed  prima 
facie  to  be  payable  to  the  bank  or  corporation  of  which  he  is  such 
officer;  and  may  be  negotiated  by  either  the  indorsement  of  the  bank 
or  corporation,  or  the  indorsement  of  the  officer. 

§73.  Indorsement  where  name  is  misspelled,  et  cetera. — Where  the 
name  of  a  payee  or  indorsee  is  wrongly  designated  or  misspelled,  he 
may  indorse  the  instrument  as  therein  described,  adding,  if  he  thinks 
fit,  his  proper  signature. 

§74.  Indorsement  in  representative  capacity. — Where  any  person  is 
under  obligation  to  indorse  in  a  representative  capacity,  he  may  in- 
dorse in  such  terms  as  to  negative  personal  liability. 

§75.  Time  of  indorsement;  presumption. — Except  where  an  indorse- 
ment bears  date  after  the  maturity  of  the  instrument  every  negotia- 
tion is  deemed  prima  facie  to  have  been  effected  before  the  instrument 
was  overdue. 

§76.  Place  of  indorsement ;  presumption. — Except  where  the  contrary 
appears  every  indorsement  is  presumed  prima  facie  to  have  been  made 
at  the  place  where  the  instrument  is  dated. 

§77.  Continuation  of  negotiable  character. — An  instrument  negotia- 
ble in  its  origin  continues  to  be  negotiable  until  it  has  been  restric- 
tively  indorsed  or  discharged  by  payment  or  otherwise. 

§78.  Striking  out  indorsement. — The  holder  may  at  any  time  strike 
out  any  indorsement  which  is  not  necessary  to  his  title.  The  indorser 
whose  indorsement  is  struck  out,  and  all  indorsers  subsequent  to  him, 
are  thereby  relieved  from  liability  on  the  instrument. 


378  Bank  and  Trade  Acceptances 

§79.  Transfer  without  indorsement;  effect  of. — Where  the  holder 
of  an  instrument  payable  to  his  order  transfers  it  for  value  without 
indorsing  it,  the  transfer  vests  in  the  transferee  such  title  as  the  trans- 
ferror had  therein,  and  the  transferee  acquires,  in  addition,  the  right  to 
have  the  indorsement  of  the  transferror.  But  for  the  purpose  of  deter- 
mining whether  the  transferee  is  a  holder  in  due  course,  the  negotia- 
tion takes  effect  as  of  the  time  when  the  indorsement  is  actually  made. 

§80.  When  prior  party  may  negotiate  instrument. — Where  an  in- 
strument is  negotiated  back  to  a  prior  party,  such  party  may,  subject 
to  the  provisions  of  this  act,  reissue  and  further  negotiate  the  same. 
But  he  is  not  entitled  to  enforce  payment  thereof  against  any  inter- 
vening party  to  whom  he  was  personally  liable, 

ARTICLE  V. 

Rights  of  Holder. 

§90.  Right  of  holder  to  sue ;   payment. 

§91.  What  constitutes  a  holder  in  due  course. 

§92.  When  person  not  deemed  holder  in  due  course. 

§93.  Notice  before  full  amount  paid. 

§94.  When  title  defective. 

§95.  What  constitutes  notice  of  defect. 

§96.  Rights  of  holder  in  due  course. 

§97.  When  subject  to  original  defenses. 

§98.  Who  deemed  holder  in  due  course. 

§90,  Right  of  holder  to  sue ;  payment. — The  holder  of  a  negotiable 
instrument  may  sue  thereon  in  his  own  name ;  and  payment  to  him 
in  due  course  discharges  the  instrument. 

§91.  What  constitutes  a  holder  in  due  course. — A  holder  in  due 
course  is  a  holder  who  has  taken  the  instrument  under  the  following 
conditions : 

1.  That  it  is  complete  and  regular  upon  its  face ; 

2.  That  he  became  the  holder,  of  it  before  it  was  overdue,  and  with- 
out notice  that  it  had  been  previously  dishonored,  if  such  was  the  fact. 

3.  That  he  took  it  in  good  faith  and  for  value ; 

4.  That  at  the  time  it  was  negotiated  to  him  he  had  no  notice  of  any 
infirmity  in  the  instrument  or  defect  in  the  title  of  the  person  nego- 
tiating it. 


Commercial  Banking  and  Cpedits  379 

§92.  When  person  not  deemed  holder  in  due  course. — Where  an  in- 
strument payable  on  demand  is  negotiated  an  unreasonable  length  of 
time  after  its  issue,  the  holder  is  not  deemed  a  holder  in  due  course. 

§93.  Notice  before  full  amount  paid. — Where  the  transferee  receives 
notice  of  any  infirmity  in  the  instrument  or  defect  in  the  title  of  the 
person  negotiating  the  same  before  he  has  paid  the  full  amount  agreed 
to  be  paid  therefor,  he  will  be  deemed  a  holder  in  due  course  only  to 
the  extent  of  the  amount  theretofore  paid  by  hinx 

§94.  When  title  defective. — The  title  of  a  person  who  negotiates  an 
instrument  is  defective  within  the  meaning  of  this  act  when  he  obtains 
the  instrument,  or  any  signature  thereto,  by  fraud,  duress,  or  force 
and  fear,  or  other  unlawful  means,  or  for  an  illegal  consideration,  or 
when  he  negotiates  it  in  breach  of  faith,  or  under  such  circumstances 
as  amount  to  a  fraud. 

§95.  What  constitutes  notice  of  defect. — To  constitute  notice  of  an 
infirmity  in  the  instrument  or  defect  in  the  title  of  the  person  nego- 
tiating the  same,  the  person  to  whom  it  is  negotiated  must  have  had 
actual  knowledge  of  the  infirmity  or  defect,  or  knowledge  of  such 
facts  that  his  action  in  taking  the  instrument  amounted  to  bad  faith. 

§96.  Rights  of  holder  in  due  course. — A  holder  in  due  course  holds 
the  instrument  free  from  any  defect  of  title  of  prior  parties  and  free 
from  defenses  available  to  prior  parties  among  themselves  and  may 
enforce  payment  of  the  instrument  for  the  full  amount  thereof  against 
all  parties  liable  thereon. 

§97.  When  subject  to  original  defenses. — In  the  hands  of  any  holder 
other  than  a  holder  in  due  course,  a  negotiable  instrument  is  subject 
to  the  same  defenses  as  if  it  were  non-negotiable.  But  a  holder  who 
derives  his  title  through  a  holder  in  due  course,  and  who  is  not  him- 
self a  party  to  any  fraud  or  illegality  affecting  the  instrument,  has  all 
the  rights  of  such  former  holder  in  respect  of  all  parties  prior  to  the 
latter. 

§98.  Who  deemed  holder  in  due  course. — Every  holder  is  deemed 
prima  facie  to  be  a  holder  in  due  course ;  but  when  it  is  shown  that  the 
title  of  any  person  who  has  negotiated  the  instrument  was  defective, 


380  Bank  and  Trade  Acceptances 

the  burden  is  on  the  holder  to  prove  that  he  or  some  person  under 
whom  he  claims  acquired  the  title  as  a  holder  in  due  course.  But  the 
last-mentioned  rule  does  not  apply  in  favor  of  a  party  who  became 
bound  on  the  instrument  prior  to  the  acquisition  of  such  defective 
title. 

ARTICLE  VI. 

Liability  of  Parties. 

§110.  Liability  of  maker. 

§111.  Liability  of  drawer. 

§113.  Liability  of  acceptor. 

§113.  When  person  deemed  indorser. 

§114.  Liability  of  irregular  indorser. 

§115.  Warranty;  where  negotiation  by  delivery,  et  cetera. 

§116.  Liability  of  general  indorsers. 

§117.  Liability  of  indorser  where  paper  negotiable  by  delivery. 

§118.  Order  in  which  indorsers  are  liable. 

§119.  Liability  of  agent  or  broker. 

§110.  Liability  of  maker. — The  maker  of  a  negotiable  instrument  by 
making  it  engages  that  he  will  pay  it  according  to  its  tenor;  and  ad- 
mits the  existence  of  the  payee  and  his  then  capacity  to  indorse. 

§111.  Liability  of  drawer. — The  drawer  by  drawing  the  instrument 
admits  the  existence  of  the  payee  and  his  then  capacity  to  indorse; 
and  engages  that  on  due  presentment  the  instrument  will  be  accepted 
and  paid,  or  both,  according  to  its  tenor,  and  that  if  it  be  dishonored 
and  the  necessary  proceedings  of  dishonor  be  duly  taken,  he  will 
pay  the  amount  thereof  to  the  holder,  or  to  any  subsequent  indorser 
who  may  be  compelled  to  pay  it.  But  the  drawer  may  insert  in  the 
instrument  an  express  stipulation  negativing  or  limiting  his  own  lia- 
bility to  the  holder. 

§112.  Liability  of  acceptor. — The  acceptor  by  accepting  the  instru- 
ment engages  that  he  will  pay  it  according  to  the  tenor  of  his  accept- 
ance ;  and  admits : 

1.  The  existence  of  the  drawer,  the  genuineness  of  his  signature, 
and  his  capacity  and  authority  to  draw  the  instrument;  and 

2.  The  existence  of  the  payee  and  his  then  capacity  to  indorse. 


Commercial  Banking  and  Cp£dits  381 

§113.  When  person  deemed  indorser. — A  person  placing  his  signa- 
ture upon  an  instrument  otherwise  than  as  maker,  drawer  or  acceptor 
is  deemed  to  be  an  indorser,  unless  he  clearly  indicates  by  appropriate 
words  his  intention  to  be  bound  in  some  other  capacity. 

§114.  Liability  of  irregular  indorser. — Where  a  person,  not  other- 
wise a  party  to  an  instrument,  places  thereon  his  signature  in  blank 
before  delivery,  he  is  liable  as  indorser  in  accordance  with  the  fol- 
lowing rules: 

1.  If  the  instrument  is  payable  to  the  order  of  a  third  person,  he 
is  liable  to  the  payee  and  to  all  subsequent  parties. 

2.  If  the  instrument  is  payable  to  the  order  of  the  maker  or  drawer, 
■or  is  payable  to  bearer,  he  is  liable  to  all  parties  subsequent  to  the 
maker  or  drawer. 

3.  If  he  signs  for  the  accommodation  of  the  payee  he  is  liable  to  all 
parties  subsequent  to  the  payee. 

§115.  Warranty  where  negotiation  by  delivery,  et  cetera. — Every 
person  negotiating  an  instrument  by  delivery  or  by  a  qualified  in- 
dorsement, warrants : 

1.  That  the  instrument  is  genuine  and  in  all  respects  what  it  pur- 
ports to  be ; 

2.  That  he  has  a  good  title  to  it; 

3.  That  all  prior  parties  had  capacity  to  contract; 

4.  That  he  has  no  knowledge  of  any  fact  which  would  impair  the 
validity  of  the  instrument  or  render  it  valueless. 

But  when  the  negotiation  is  by  delivery  only,  the  warranty  extends 
in  favor  of  no  holder  other  than  the  immediate  transferee.  The  pro- 
vision of  subdivision  three  of  this  section  does  not  apply  to  persons 
negotiating  public  or  corporate  securities,  other  than  bills  and  notes. 

§116.  Liability  of  general  indorser. — Every  indorser  who  indorses 
without  qualification,  warrants  to  all  subsequent  holders  in  due  course: 

1.  The  matter  and  things  mentioned  in  subdivisions  one,  two  and 
three  of  the  next  preceding  section ;  and 

2.  That  the  instrument  is  at  the  time  of  his  indorsement  valid  and 
subsisting. 

And,  in  addition,  he  engages  that  on  due  presentment,  it  shall  be 
accepted  or  paid,  or  both,  as  the  case  may  be,  according  to  its  tenor, 
and  that  if  it  be  dishonored,  and  the  necessary  proceedings  on  dis- 


382  Bank  and  Trade  Acceptances 

honor  be  duly  taken,  he  will  pay  the  amount  thereof  to  the  holder,  or 
to  any  subsequent  indorser  who  may  be  compelled  to  pay  it. 

§117.  Liability  of  indorser  where  paper  negotiable  by  delivery.— 

Where  a  person  places  his  indorsement  on  an  instrument  negotiable 
by  delivery  he  incurs  all  the  Habilities  of  an  indorser. 

§118.  Order  in  which  indorsers  are  liable. — As  respects  one  another, 
indorsers  are  liable  prima  facie  in  the  order  in  which  they  indorse; 
but  evidence  is  admissible  to  show  that  as  between  or  among  them- 
selves they  have  agreed  otherwise.  Joint  payees  or  joint  indorsees 
who  indorse  are  deemed  to  indorse  jointly  and  severally. 

§119.  Liability  of  agent  or  broker. — Where  a  broker  or  other  agent 
negotiates  an  instrument  without  indorsement,  he  incurs  all  the  lia- 
bilities prescribed  by  section  one  hundred  and  fifteen  of  this  act,  un- 
less he  discloses  the  name  of  his  principal,  and  the  fact  that  he  is 
acting  only  as  agent. 

ARTICLE  VIL 

Presentment  for  Payment. 

§130.  Effect  of  want  of  demand  on  principal  debtor. 
§131.  Presentment  where  instrument  is  not  payable  on  demand. 
§132.  What  constitutes  a  sufficient  presentment 
§133.  Place  of  presentment. 
§134.  Instrument  must  be  exhibited. 
§135.  Presentment  where  instrument  payable  at  bank. 
§136.  Presentment  where  principal  debtor  is  dead. 
§137.  Presentment  to  persons  liable  as  partners. 
§138.  Presentment  to  joint  debtors. 

§139.  When  presentment  not  required  to  charge  the  drawer. 
§140.  When  presentment  not  required  to  charge  the  indorser. 
§141,  When  delay  in  making  presentment  is  excused. 
§142.  When  presentment  may  be  dispensed  with. 
§143.  When  instrument  dishonored  by  non-payment. 
§144.  Liability  of  person  secondarily  liable,  when  instrument  dis- 
honored. 
§145.  Time  of  maturity. 


Commercial  Banking  and  Cpedits  383 

§146.  Time ;  how  computed. 

§147.  Rule  where  instrument  payable  at  bank. 

§148.  What  constitutes  payment  in  due  course. 

§130.  Effect  of  want  of  demand  on  principal  debtor. — Presentment 
for  payment  is  not  necessary  in  order  to  charge  the  person  primarily  li- 
able on  the  instrument;  but  if  the  instrument  is,  by  its  terms,  payable 
at  a  special  place,  and  he  is  able  and  willing  to  pay  it  there  at  maturity 
and  has  funds  there  available  for  that  purpose,  such  abiilty  and  will- 
ingness are  equivalent  to  a  tender  of  payment  upon  his  part.  But  ex- 
cept as  herein  otherwise  provided,  presentment  for  payment  is  neces- 
sary in  order  to  charge  the  drawer  and  indorsers. 

§131.  Presentment  where  instrument  is  not  payable  on  demand. — 
Where  the  instrument  is  not  payable  on  demand,  presentment  must  be 
made  on  the  day  it  falls  due.  Where  it  is  payable  on  demand,  pre- 
sentment must  be  made  within  a  reasonable  time  after  its  issue,  ex- 
cept that  in  case  of  a  bill  of  exchange,  presentment  for  payment  will 
be  sufficient  if  made  within  a  reasonable  time  after  the  last  negotia- 
tion thereof. 

§132.  What  constitutes  a  sufficient  presentment. — Presentment  for 
payment,  to  be  sufficient,  must  be  made : 

1.  By  the  holder,  or  by  some  person  authorized  to  receive  payment 
on  his  behalf; 

2.  At  a  reasonable  hour  on  a  business  day ; 

3.  At  a  proper  place  as  herein  defined ; 

4.  To  the  person  primarily  liable  on  the  instrument,  or  if  he  is  ab- 
sent or  inaccessible,  to  any  person  found  at  the  place  where  the  pre- 
sentment is  made. 

§133.  Place  of  presentment. — Presentment  for  payment  is  made  at 
the  proper  place : 

1.  Where  a  place  of  payment  is  specified  in  the  instrument  and  it 
is  there  presented ; 

2.  Where  no  place  of  payment  is  specified,  but  the  address  of  the 
person  to  make  payment  is  given  in  the  instrument  and  it  is  there 
presented ; 

3.  Where  no  place  of  payment  is  specified  and  no  address  is  given 
and  the  instrument  is  presented  at  the  usual  place  of  business  or 
residence  of  the  person  to  make  payment. 


384  Bank  and  Trade  Acceptances 

4.  In  any  other  case  if  presented  to  the  person  to  make  payment 
wherever  he  can  be  found,  or  if  presented  at  his  last  known  place 
of  business  or  residence. 

§134.  Instrument  must  be  exhibited. — The  instrument  must  be  ex- 
hibited to  the  person  from  whom  payment  is  demanded,  and  when  it 
is  paid  must  be  delivered  up  to  the  party  paying  it. 

§125.  Presentment  where  instrument  payable  at  bank. — Where  the 
instrument  is  payable  at  a  bank,  presentment  for  payment  must  be 
made  during  banking  hours,  unless  the  person  to  make  payment  has 
no  funds  there  to  meet  it  at  any  time  during  the  day,  in  which  case 
presentment  at  any  hour  before  the  bank  is  closed  on  that  day  is  suf- 
ficient. 

§136.  Presentment  where  principal  debtor  is  dead. — Where  the  per- 
son primarily  liable  on  the  instrument  is  dead,  and  no  place  of  payment 
is  specified,  presentment  for  payment  must  be  made  to  his  personal 
representative,  if  such  there  be,  and  if  with  the  exercise  of  reasonable 
diligence,  he  can  be  found. 

§137.  Presentment  to  persons  liable  as  partners. — Where  the  per- 
sons primarily  liable  on  the  instrument  are  liable  as  partners,  and  no 
place  of  payment  is  specified,  presentment  for  payment  may  be  made 
to  any  one  of  them,  even  though  there  has  been  a  dissolution  of  the 
firm. 

§138.  Presentment  to  joint  debtors. — Where  there  are  several  per- 
sons not  partners,  primarily  liable  on  the  instrument,  and  no  place  of 
payment  is  specified,  presentment  must  be  made  to  them  all. 

§139.  When  presentment  not  required  to  charge  the  drawer. — Pre- 
sentment for  payment  is  not  required  in  order  to  charge  the  drawer 
where  he  has  not  right  to  expect  or  require  that  the  drawee  or  acceptor 
will  pay  instrument. 

§140.  When  presentment  not  required  to  charge  the  indorser. — 

Presentment  for  payment  is  not  required  in  order  to  charge  an  indorser 
where  the  instrument  was  made  or  accepted  for  his  accommodation, 
and  he  has  no  reason  to  expect  that  the  instrument  will  be  paid  if 
presented. 


Commercial  Banking  and  Cb£dits  385 

§141.  When  delay  in  making  presentment  is  excused. — Delay  in 
making  presentment  for  payment  is  excused  when  the  delay  is  caused 
by  circumstances  beyond  the  control  of  the  holder  and  not  imputable 
to  his  default,  misconduct  or  negligence.  When  the  cause  of  delay 
ceases  to  operate,  presentment  must  be  made  with  reasonable  dili- 
gence. 

§142.  When  presentment  may  be  dispensed  with. — Presentment  for 
payment  is  dispensed  with : 

1.  Where  after  the  exercise  of  reasonable  diligence  presentment  as 
required  by  this  act  cannot  be  made ; 

2.  Where  the  drawee  is  a  fictitious  person ; 

3.  By  waiver  of  presentment  express  or  implied. 

§143.  When  instrument  dishonored  by  non-payment. — The  instru- 
ment is  dishonored  by  non-payment  when : 

1.  It  is  duly  presented  for  payment  and  payment  is  refused  or  can- 
not be  obtained ;  or 

2.  Presentment  is  excused  and  the  instrument  is  overdue  and  un- 
paid. 

§144.  Liability  of  person  secondarily  liable,  when  instrument  dis- 
honored.— Subject  to  the  provisions  of  this  act,  when  the  instrument 
is  dishonored  by  non-payment,  an  immediate  right  of  recourse  to  all 
parties  secondarily  liable  thereon,  accrues  to  the  holder. 

§145.  Time  of  maturity. — Every  negotiable  instrument  is  payable 
at  the  time  fixed  therein  without  grace.  When  the  day  of  maturity 
falls  upon  Sunday  or  a  holiday,  the  instrument  is  payable  on  the  next 
succeeding  business  day.  Instruments  falling  due  or  becoming  paya- 
ble on  Saturday  are  to  be  presented  for  payment  on  the  next  succeed- 
ing business  day,  except  that  instruments  payable  on  demand  may,  at 
the  option  of  the  holder,  be  presented  for  payment  before  12  o'clock 
noon  on  Saturday  when  that  entire  day  is  not  a  holiday. 

§146.  Time ;  how  computed. — Where  the  instrument  is  payable  at  a 
fixed  period  after  date,  after  sight,  or  after  the  happening  of  a  speci- 
fied event,  the  time  of  payment  is  determined  by  excluding  the  day 
from  which  the  time  is  to  begin  to  run,  and  by  including  the  date  of 
payment. 


386  Bank  and  Trade  Acceptances 

§147.  Rule  where  instrument  payable  at  bank. — Where  an  instru- 
ment is  made  payable  at  a  bank  it  is  equivalent  to  an  order  to  the  bank 
to  pay  the  same  for  the  account  of  the  principal  debtor  thereon. 

§148.  What  constitutes  payment  in  due  course. — Payment  is  made 
in  due  course  when  it  is  made  at  or  after  the  maturity  of  the  instru- 
ment to  the  holder  thereof  in  good  faith  and  without  notice  that  his 
title  is  defective. 

ARTICLE  VIII. 

Notice  of  Dishonor. 

§160.  To  whom  notice  of  dishonor  must  be  given. 

§161.  By  whom  given. 

§162.  Notice  given  by  agent. 

§163.  Effect  of  notice  given  on  behalf  of  holder. 

§164.  Effect  where  notice  is  given  by  party  entitled  thereto. 

§165.  When  agent  may  give  notice. 

§166.  When  notice  sufficient. 

§167.  Form  of  notice. 

§168.  To  whom  notice  may  be  given. 

§169.  Notice  where  party  is  dead. 

§170.  Notice  to  partners. 

§171.  Notice  to  persons  jointly  liable. 

§172.  Notice  to  bankrupt. 

§173.  Time  within  which  notice  must  be  given. 

§174.  Where  parties  reside  in  same  place. 

§175.  Where  parties  reside  in  different  places. 

§176.  When  sender  deemed  to  have  given  due  notice. 

§177.  Deposit  in  post-office,  what  constitutes. 

§178.  Notice  to  subsequent  parties,  time  of. 

§179.  Where  notice  must  be  sent. 

§180.  Waiver  of  notice. 

§181.  Whom  affected  by  waiver. 

§182.  Waiver  of  protest. 

§183.  When  notice  dispensed  with. 

§184.  Delay  in  giving  notice ;  how  excused. 

§185.  When  notice  need  not  be  given  to  drawer. 

§186.  When  notice  need  not  be  given  to  indorser. 


Commercial  Banking  and  Cpzdits  387 

§187.  Notice  of  non-payment  where  acceptance  refused, 
§188.  Effect  of  omission  to  give  notice  of  non-acceptance. 
§189.  When  protest  need  not  be  made;  when  must  be  made. 

§160.  To  whom  notice  of  dishonor  must  be  given. — Except  as  here- 
in otherwise  provided,  when  a  negotiable  instrument  has  been  dis- 
honored by  non-acceptance  or  non-payment,  notice  of  dishonor  must 
be  given  to  the  drawer  and  to  each  indorser,  and  any  drawer  or  in- 
dorser  to  whom  such  notice  is  not  given  is  discharged. 

§161.  By  whom  given. — The  notice  may  be  given  by  or  on  behalf 
of  the  holder,  or  by  or  on  behalf  of  any  party  to  the  instrument  who 
might  be  compelled  to  pay  it  to  the  holder,  and  who,  upon  taking  it 
up,  would  have  a  right  to  reimbursement  from  the  party  to  whom  the 
notice  is  given. 

§162.  Notice  given  by  agent. — Notice  of  dishonor  may  be  given  by 
an  agent  either  in  his  own  name  or  in  the  name  of  any  party  entitled 
to  give  notice  whether  that  party  be  his  principal  or  not. 

§163.  Effect  of  notice  given  on  behalf  of  holder. — Where  notice  is 
given  by  or  on  behalf  of  the  holder,  it  inures  for  the  benefit  of  all  sub- 
sequent holders  and  all  prior  parties  who  have  a  right  of  recourse 
against  the  party  to  whom  it  is  given. 

§164.  Effect  where  notice  is  given  by  party  entitled  thereto. — Where 
notice  is  given  by  or  on  behalf  of  a  party  entitled  to  give  notice,  it  in- 
ures for  the  benefit  of  the  holder  and  all  parties  subsequent  to  the 
party  to  whom  notice  is  given. 

§165.  When  agent  may  give  notice. — Where  the  instrument  has 
been  dishonored  in  the  hands  of  an  agent,  he  may  either  himself  give 
notice  to  the  parties  liable  thereon,  or  he  may  give  notice  to  his  prin- 
cipal. If  he  give  notice  to  his  principal,  he  must  do  so  within  the  same 
time  as  if  he  were  the  holder,  and  the  principal,  upon  the  receipt  of 
such  notice,  has  himself  the  same  time  for  giving  notice  as  if  the  agent 
had  been  an  independent  holder. 

§166.  When  notice  sufficient. — A  written  notice  need  not  be  signed, 
and  an  insufficient  written  notice  may  be  supplemented  and  validated 


388  Bank  and  Trade  Acceptances 

by  verbal  communication.  A  misdescription  of  the  instrument  does 
not  vitiate  the  notice  unless  the  party  to  whom  the  notice  is  given 
is  in  fact  misled  thereby. 

§167.  Form  of  notice. — The  notice  may  be  in  writing  or  merely  oral, 
and  may  be  given  in  any  terms  which  sufficiently  identify  the  instru- 
ment, and  indicate  that  it  has  been  dishonored  by  non-acceptance  or 
non-payment.  It  may  in  all  cases  be  given  by  delivering  it  personally 
or  through  the  mails. 

§168.  To  whom  notice  may  be  given. — Notice  of  dishonor  may  be 
given  either  to  the  party  himself  or  to  his  agent  in  that  behalf. 

§169.  Notice  where  party  is  dead. — When  any  party  is  dead,  and 
his  death  is  known  to  the  party  giving  notice,  the  notice  must  be  giv- 
en to  a  personal  representative,  if  there  be  one,  and  if  with  reasonable 
diligence  he  can  be  found.  If  there  be  no  personal  representative,  no- 
tice may  be  sent  to  the  last  residence  or  last  place  of  business  of  the 
deceased. 

§170.  Notice  to  partners. — Where  the  parties  to  be  notified  are  part- 
ners, notice  to  any  one  partner  is  notice  to  the  firm,  even  though  there 
has  been  a  dissolution. 

§171.  Notice  to  persons  jointly  liable. — Notice  to  joint  parties  who 
are  not  partners  must  be  given  to  each  of  them,  unless  one  of  them  has 
authority  to  receive  such  notice  for  the  others. 

§172.  Notice  to  bankrupt.— Where  a  party  has  been  adjudged  a 
bankrupt  or  an  insolvent,  or  has  made  an  assignment  for  the  bene- 
fit of  creditors,  notice  may  be  given  either  to  the  party  himself  or  to 
his  trustee  or  assignee. 

§173.  Time  within  which  notice  must  be  given.— Notice  may  be  giv- 
en as  soon  as  the  instrument  is  dishonored ;  and  unless  delay  is  excused 
as  hereinafter  provided,  must  be  given  within  the  times  fixed  by  this 
act. 

§174.  Where  parties  reside  in  same  place.— Where  the  person  giv- 
ing and  the  person  to  receive  notice  reside  in  the  same  place,  notice 
must  be  given  within  the  following  times : 


Commercial  Banking  and  Credits  389 

1.  If  given  at  the  place  of  business  of  the  person  to  receive  notice, 
it  must  be  given  before  the  close  of  business  hours  on  the  day  follow- 
ing; 

2.  If  given  at  his  residence,  it  must  be  given  before  the  usual  hours 
of  rest  on  the  day  following; 

3.  If  sent  by  mail,  it  must  be  deposited  in  the  post-ofifice  in  time  to 
reach  him  in  usual  course  on  the  day  following. 

§175,  Where  parties  reside  in  different  places. — Where  the  person 
giving  and  the  person  to  receive  notice  reside  in  different  places,  the 
notice  must  be  given  within  the  following  times : 

1.  If  sent  by  mail,  it  must  be  deposited  in  the  post-office  in  time  to 
go  by  mail  the  day  following  the  day  of  dishonor,  or  if  there  be  no  mail 
at  a  convenient  hour  on  that  day,  by  the  next  mail  thereafter. 

2.  If  given  otherwise  than  through  the  post-office,  then  within  the 
time  that  notice  would  have  been  received  in  due  course  of  mail,  if  it 
had  been  deposited  in  the  post-office  within  the  time  specified  in  the 
last  subdivision. 

§176.  When  sender  deemed  to  have  given  due  notice. — Where  no- 
tice of  dishonor  is  duly  addressed  and  deposited  in  the  post-office,  the 
sender  is  deemed  to  have  given  due  notice,  notwithstanding  any  mis- 
carriage in  the  mails. 

§177.  Deposit  in  post-office;  what  constitutes. — Notice  is  deemed  to 
have  been  deposited  in  the  post-office  when  deposited  in  any  branch 
post-office  or  in  any  letter-box  under  the  control  of  the  post-office  de- 
partment. 

§178.  Notice  to  antecedent  party;  time  of. — Where  a  party  receives 
notice  of  dishonor,  he  has,  after  the  receipt  of  such  notice,  the  same 
time  for  giving  notice  to  antecedent  parties  that  the  holder  has  after 
the  dishonor. 

§179.  Where  notice  must  be  sent. — Where  a  party  has  added  an 
address  to  his  signature,  notice  of  dishonor  must  be  sent  to  that  ad- 
dress; but  if  he  has  not  given  such  address,  then  the  notice  must  be 
sent  as  follows: 

1.  Either  to  the  post-office  nearest  to  his  place  of  residence,  or  to 
the  post-office  where  he  is  accustomed  to  receive  his  letters;  or 


390  Bank  and  Trade  AccEPtANCES 

2.  If  he  live  in  one  place,  and  have  his  place  of  business  in  another, 
notice  may  be  sent  to  either  place ;  or 

3.  If  he  is  sojourning  in  another  place,  notice  may  be  sent  to  the 
place  where  he  is  so  sojourning. 

But  where  the  notice  is  actually  received  by  the  party  within  the 
time  specified  in  this  act,  it  will  be  sufficient,  though  not  sent  in  ac- 
cordance with  the  requirements  of  this  section. 

§180.  Waiver  of  notice. — Notice  of  dishonor  may  be  waived,  either 
before  the  time  of  giving  notice  has  arrived  or  after  the  omission  to 
give  due  notice,  and  the  waiver  may  be  express  or  implied. 

§181.  Whom  affected  by  waiver. — Where  the  waiver  is  embodied  in 
the  instrument  itself,  it  is  binding  upon  all  parties ;  but  where  it  is 
written  above  the  signature  of  an  indorser,  it  binds  him  only. 

§182.  Waiver  of  protest. — A  waiver  of  protest,  whether  in  the  case 
of  a  foreign  bill  of  exchange  or  other  negotiable  instrument,  is  deemed 
to  be  a  waiver  not  only  of  a  formal  protest,  but  also  of  presentment 
and  notice  of  dishonor. 

§183.  When  notice  is  dispensed  with. — Notice  of  dishonor  is  dis- 
pensed with  when,  after  the  exercise  of  reasonable  diligence,  it  can- 
not be  given  to  or  does  not  reach  the  parties  sought  to  be  charged. 

§184.  Delay  in  giving  notice;  how  excused. — Delay  in  giving  notice 
of  dishonor  is  excused  when  the  delay  is  caused  by  circumstances 
beyond  the  control  of  the  holder  and  not  imputable  to  his  default, 
misconduct  or  negligence.  When  the  cause  of  delay  ceases  to  oper- 
ate, notice  must  be  given  with  reasonable  diligence. 

§185.  When  notice  need  not  be  given  to  drawer. — Notice  of  dis- 
honor is  not  required  to  be  given  to  the  drawer  in  either  of  the  fol- 
lowing cases: 

1.  Where  the  drawer  and  drawee  are  the  same  person; 

2.  Where  the  drawee  is  a  fictitious  person  or  a  person  not  having 
capacity  to  contract; 

3.  Where  the  drawer  is  the  person  to  whom  the  instrument  is  pre- 
sented for  payment; 


Commercial  Banking  and  Cbedits  391 

4.  Where  the  drawer  has  no  right  to  expect  or  require  that  the 
drawee  or  acceptor  will  honor  the  instrument; 

5.  Where  the  drawer  has  countermanded  payment. 

§186.  When  notice  need  not  be  given  to  indorser. — Notice  of  dis- 
honor is  not  required  to  be  given  to  an  indorser  in  either  of  the  follow- 
ing cases :  , 

1.  Where  the  drawee  is  a  fictitious  person  or  a  person  not  having 
capacity  to  contract,  and  the  indorser  was  aware  of  the  fact  at  the 
time  he  indorsed  the  instrument; 

2.  Where  the  indorser  is  the  person  to  whom  the  instrument  is  pre- 
sented for  payment; 

3.  Where  the  instrument  was  made  or  accepted  for  his  accommo- 
dation. 

§187.  Notice  of  non-payment  where  acceptance  refused. — Where 
due  notice  of  dishonor  by  non-acceptance  has  been  given,  notice  of  a 
subsequent  dishonor  by  non-payment  is  not  necessary  unless  in  the 
meantime  the  instrument  has  been  accepted. 

§188.  Effect  of  omission  to  give  notice  of  non-acceptance. — An  omis- 
sion to  give  notice  of  dishonor  by  non-acceptance  does  not  prejudice 
the  rights  of  a  holder  in  due  course  subsequent  to  the  omission. 

§189.  When  protest  need  not  be  made;  when  must  be  made. — Where 
any  negotiable  instrument  has  been  dishonored  it  may  be  protested 
for  non-acceptance  or  non-payment,  as  the  case  may  be ;  but  protest 
is  not  required,  except  in  the  case  of  foreign  bills  of  exchange. 

ARTICLE  IX. 

Discharge  of  Negotiable  Instruments. 

§200.  Instrument;    how  discharged, 

§201.  When  person  secondarily  liable  on,  discharged. 

§202.  Right  of  party  who  discharges  instrument. 

§203.  Renunciation  by  holder. 

§204.  Cancellation ;    unintentional ;    burden  of  proof. 

§205.  Alteration  of  instrument ;    cfTect  of. 

§206.  What  constitutes  a  material  alteration. 


39^  Bank  and  Trade  Acceptances 

§200.  How  instrument  discharged. — A  negotiable  instrument  is  dis- 
charged : 

1.  By  payment  in  due  course  by  or  on  behalf  of  the  principal 
debtor; 

2.  By  payment  in  due  course  by  the  party  accommodated,  where  the 
instrument  is  made  or  accepted  for  accommodation ; 

3.  By  the  intentional  cancellation  thereof  by  the  holder; 

4.  By  any  other  act  which  will  discharge  a  simple  contract  for  the 
payment  of  money; 

6.  When  the  principal  debtor  becomes  the  holder  of  the  instru- 
ment at  or  after  maturity  in  his  own  right. 

§201.  When  persons  secondarily  liable  on,  discharged. — A  person 
secondarily  liable  on  the  instrument  is  discharged: 

1.  By  any  act  which  discharges  the  instrument ; 

2.  By  the  intentional  cancellation  of  his  signature  by  the  holder; 

3.  By  the  discharge  of  a  prior  party ; 

4.  By  a  valid  tender  of  payment  made  by  a  prior  party ; 

5.  By  a  release  of  the  principal  debtor,  unless  the  holder's  right  of 
recourse  against  the  party  secondarily  liable  is  expressly  reserved; 

6.  By  any  agreement  binding  upon  the  holder  to  extend  the  time  of 
payment  or  to  postpone  the  holder's  right  to  enforce  the  instrument, 
(unless  made  with  the  assent  of  the  party  secondarily  liable,  or)  un- 
less the  right  of  recourse  against  such  party  is  expressly  reserved. 

§202.  Right  of  party  who  discharges  instrument. — Where  the  instru- 
ment is  paid  by  a  party  secondarily  liable  thereon,  it  is  not  discharged ; 
but  the  party  so  paying  it  is  remitted  to  his  former  rights  as  regards 
all  prior  parties,  and  he  may  strike  out  his  own  and  all  subsequent 
indorsements,  and  again  negotiate  the  instrument,  except: 

1.  Where  it  is  payable  to  the  order  of  a  third  person,  and  has  been 
paid  by  the  drawer;   and 

2.  Where  it  was  made  or  accepted  for  accommodation,  and  has  been 
paid  by  the  party  accommodated. 

§203.  Renunciation  by  holder. — The  holder  may  expressly  renounce 
his  rights  against  any  party  to  the  instrument,  before,  at  or  after  its 
maturity.  An  absolute  and  unconditional  renunciation  ©f  his  rights 
against  the  principal  debtor  made  at  or  after  the  maturity  of  the 
instrument,  discharges  the  instrument.     But  a  renunciation  does  not 


Commercial  Banking  and  Credits  393 

affect  the  rights  of  a  holder  in  due  course  without  notice.  A  renuncia- 
tion must  be  in  writing,  unless  the  instrument  is  delivered  up  to  the 
person  primarily  liable  thereon. 

§204.  Cancellation;  unintentional;  burden  of  proof. — A  cancella- 
tion made  unintentionally,  or  under  a  mistake,  or  without  the  author- 
ity of  the  holder,  is  inoperative ;  but  where  an  instrument  or  any  sig- 
nature thereon  appears  to  have  been  cancelled  the  burden  of  proof  lies 
on  the  party  who  alleges  that  the  cancellation  was  made  unintention- 
ally, or  under  a  mistake  or  without  authority. 

§205.  Alteration  of  instrument;  effect  of. — Where  a  negotiable  in- 
strument is  materially  altered  without  the  assent  of  all  parties  liable 
thereon,  it  is  avoided  except  as  against  a  party  who  has  himself  made, 
authorized  or  assented  to  the  alteration  and  subsequent  indorsers. 
But  when  an  instrument  has  been  materially  altered  and  is  in  the 
hands  of  a  holder  in  due  course,  not  a  party  to  the  alteration,  he  may 
enforce  payment  thereof  according  to  its  original  tenor. 

§206.  What  constitutes  a  material  alteration. — Any  alteration  which 
changes : 

1.  The  date ; 

2.  The  sum  payable,  either  for  principal  or  interest ; 

3.  The  time  or  place  of  payment; 

4.  The  number  or  the  relations  of  the  parties ; 

5.  The  medium  or  currency  in  which  payment  is  to  be  made ; 

Or  which  adds  a  place  of  payment  where  no  place  of  payment  is 
specified,  or  any  other  change  or  addition  which  alters  the  effect  of  the 
instrument  in  any  respect,  is  a  material  alteration. 

ARTICLE  X. 

Bills  of  Exchange;    Form  and  Interpretation. 

§210.  Bill  of  exchange  defined. 

§211.  Bill  not  an  assignment  of  funds  in  hands  of  drawee. 

§212.  Bill  addressed  to  more  than  one  drawee. 

§213.  Inland  and  foreign  bills  of  exchange. 

§214.  When  bill  may  be  treated  as  promissory  note. 

§215.  Referee  in  case  of  need. 


394  Bank  and  Trade  Acceptances 

§210.  Bill  of  exchange  defined. — A  bill  of  exchange  is  an  uncondi- 
tional order  in  writing  addressed  by  any  person  to  another  signed  by 
the  person  giving  it,  requiring  the  person  to  whom  it  is  addressed  to 
pay  on  demand  or  at  a  fixed  or  determinable  future  time  a  sum  certain 
in  money  to  order  or  to  bearer. 

§211.  Bill  not  an  assignment  of  funds  in  hands  of  drawee. — A  bill  of 
itself  does  not  operate  as  an  assignment  of  the  funds  in  the  hands  of 
the  drawee  available  for  the  payment  thereof,  and  the  drawee  is  not 
liable  on  the  bill  unless  and  until  he  accepts  the  same. 

§212.  Bill  adressed  to  more  than  one  drawee. — A  bill  may  be  ad- 
dressed to  two  or  more  drawees  jointly,  whether  they  are  partners  or 
not ;  but  not  to  two  or  more  drawees  in  the  alternative  or  in  the  suc- 
cession. 

§213.  Inland  and  foreign  bills  of  exchange. — An  inland  bill  of  ex- 
change is  a  bill  which  is,  or  on  its  face  purports  to  be,  both  drawn 
and  payable  within  this  State.  Any  other  bill  is  a  foreign  bill.  Unless 
the  contrary  appears  on  the  face  of  the  bill,  the  holder  may  treat  it  as 
an  inland  bill. 

§214.  When  bill  may  be  treated  as  promissory  note. — Where  in  a  bill 
the  drawer  and  drawee  are  the  same  person,  or  where  the  drawee  is  a 
fictitious  person,  or  a  person  not  having  capacity  to  contract,  the 
holder  may  treat  the  instrument,  at  his  option,  either  as  a  bill  of  ex- 
change or  a  promissory  note. 

§215.  Referee  in  case  of  need. — The  drawer  of  a  bill  and  any  in- 
dorser  may  insert  thereon  the  name  of  a  person  to  whom  the  holder 
may  resort  in  case  of  need,  that  is  to  say,  in  case  the  bill  is  dishonored 
by  non-acceptance  or  non-payment.  Such  person  is  called  the  referee 
in  case  of  need.  It  is  in  the  option  of  the  holder  to  resort  to  the 
referee  in  case  of  need  or  not  as  he  may  see  fit. 

ARTICLE  XL 

Acceptance  of  Bills  of  Exchange. 

§220.  Acceptance,  how  made,  et  cetera. 

§221.  Holder  entitled  to  acceptance  on  face  of  bill. 

§222.  Acceptance  by  separate  instrument. 

§223.  Promise  to  accept;  when  equivalent  to  acceptance. 


Commercial  Banking  and  Cbedits  395 

§224.  Time  allowed  drawee  to  accept. 

§225.  Liability  of  drawee  retaining  or  destroying  bill. 

§226.  Acceptance  of  incomplete  bill. 

§227.  Kinds  of  acceptances. 

§228.  What  constitutes  a  general  acceptance. 

§229.  Qualified  acceptance. 

§230.  Rights  of  parties  as  to  qualified  acceptance. 

§220.  Acceptance;  how  made,  et  cetera. — The  acceptance  of  a  bill  is 
the  signification  by  the  drawee  of  his  assent  to  the  order  of  the  drawer. 
The  acceptance  must  be  in  writing  and  signed  by  the  drawee.  It 
must  not  express  that  the  drawee  will  perform  his  promise  by  any 
other  means  than  the  payment  of  money. 

§221.  Holder  entitled  to  acceptance  on  face  of  bill. — The  holder 
of  a  bill  presenting  the  same  for  acceptance  may  require  that  the 
acceptance  be  written  on  the  bill,  and  if  such  request  is  refused,  may 
treat  the  bill  as  dishonored. 

§222.  Acceptance  by  separate  instrument. — Where  an  acceptance  is 
written  on  a  paper  other  than  the  bill  itself,  it  does  not  bind  the  ac- 
ceptor, except  in  favor  of  a  person  to  whom  it  is  shown  and  who,  on 
the  faith  thereof,  receives  the  bill  for  value. 

§223.  Promise  to  accept;  when  equivalent  to  acceptance. — An  un- 
conditional promise  in  writing  to  accept  a  bill  before  it  is  drawn 
is  deemed  an  actual  acceptance  in  favor  of  every  person,  who,  upon 
the  faith  thereof,  receives  the  bill  for  value. 

§224.  Time  allowed  drawee  to  accept. — The  drawee  is  allowed 
twenty-four  hours  after  presentment  in  which  to  decide  whether  or  not 
he  will  accept  the  bill;  but  the  acceptance  if  given  dates  as  of  the 
day  of  presentation. 

§225.  Liability  of  drawee  retaining  or  destroying  bill. — Where  a 
drawee  to  whom  a  bill  is  delivered  for  acceptance  destroys  the  same, 
or  refuses  within  twenty-four  hours  after  such  delivery,  or  within  such 
other  period  as  the  holder  may  allow,  to  return  the  bill  accepted  or 
non-accepted  to  the  holder,  he  will  be  deemed  to  have  accepted  the 
same. 


396  Bank  and  Trade  Acceptances 

§226,  Acceptance  of  incomplete  bill. — A  bill  may  be  accepted  before 
it  has  been  signed  by  the  drawer,  or  while  otherwise  incomplete,  or 
when  it  is  overdue,  or  after  it  has  been  dishonored  by  a  previous 
refusal  to  accept,  or  by  non-payment.  But  when  a  bill  payable  after 
sight  is  dishonored  by  non-acceptance  and  the  drawee  subsequently 
accepts  it,  the  holder,  in  the  absence  of  any  dififerent  agreement,  is 
entitled  to  have  the  bill  accepted  as  of  the  date  of  the  first  present- 
ment. 

§227.  Kinds  of  acceptance. — An  acceptance  is  either  general  or  qual- 
ified. A  general  acceptance  assents  without  qualification  to  the  order 
of  the  drawer.  A  qualified  acceptance  in  express  terms  varies  the 
eflfect  of  the  bill  as  drawn. 

§228.  What  constitutes  a  general  acceptance. — An  acceptance  to 
pay  at  a  particular  place  is  a  general  acceptance  unless  it  expressly 
states  that  the  bill  is  to  be  paid  there  only  and  not  elsewhere. 

§229.  Qualified  acceptance. — An  acceptance  is  qualified  which  is: 

1.  Conditional,  that  is  to  say,  which  makes  payment  by  the  ac- 
ceptor dependent  on  the  fulfillment  of  a  condition  therein  stated ; 

2.  Partial,  that  is  to  say,  an  acceptance  to  pay  part  only  of  the 
amount  for  which  the  bill  is  drawn ; 

3.  Local,  that  is  to  say,  an  acceptance  to  pay  only  at  a  particular 
place ; 

4.  Qualified  as  to  time ; 

5.  The  acceptance  of  some  one  or  more  of  the  drawees,  but  not 
of  all. 

§230.  Rights  of  parties  as  to  qualified  acceptance. — The  holder  may 
refuse  to  take  a  qualified  acceptance,  and  if  he  doea  not  obtain  an  un- 
qualified acceptance,  he  may  treat  the  bill  as  dishonored  by  non-ac- 
ceptance. Where  a  qualified  acceptance  is  taken,  the  drawer  and  in- 
dorsers  are  discharged  from  liability  on  the  bill,  unless  they  have  ex- 
pressly or  impliedly  authorized  the  holder  to  take  a  qualified  accept- 
ance, or  subsequently  assent  thereto.  When  the  drawer  or  an  in- 
dorser  receives  notice  of  a  qualified  acceptance,  he  must  within  a  rea- 
sonable time  express  his  dissent  to  the  holder,  or  he  will  be  deemed  to 
have  assented  thereto. 


Commercial  Banking  and  Cpjidits  397 

ARTICLE  XII. 

Presentment  of  Bills  of  Exchange  for  Acceptance. 

§240.  When  presentment  for  acceptance  must  be  made. 

§241.  When  failure  to  present  releases  drawer  and  indorser. 

§242.  Presentment;  how  made. 

§243.  On  what  days  presentment  may  be  made. 

§244.  Presentment ;   where  time  is  insufficient. 

§245.  When  presentment  is  excused. 

§246.  When  dishonored  by  non-acceptance. 

§247.  Duty  of  holder  where  bill  not  accepted. 

§248.  Rights  of  holder  where  bill  not  accepted. 

§240.  When  presentment  for  acceptance  must  be  made. — Present- 
ment for  acceptance  must  be  made : 

1.  Where  the  bill  is  payable  after  sight  or  in  any  other  case  where 
presentment  for  acceptance  is  necessary  in  order  to  fix  the  maturity  of 
the  instrument;  or 

2.  Where  the  bill  expressly  stipulates  that  it  shall  be  presented 
for  acceptance ;   or 

3.  Where  the  bill  is  drawn  payable  elsewhere  than  at  the  residence 
or  place  of  business  of  the  drawee. 

In  no  other  case  is  presentment  for  acceptance  necessary  in  order  to 
render  'any  party  to  the  bill  liable. 

§241.  When  failure  to  present  releases  drawer  and  indorser. — Ex- 
cept as  herein  otherwise  provided,  the  holder  of  a  bill  which  is  re- 
quired by  the  next  preceding  section  to  be  presented  for  acceptance 
must  either  present  it  for  acceptance  or  negotiate  it  within  a  reason- 
able time.  If  he  fails  to  do  so,  the  drawer  and  all  indorsers  are  dis- 
charged. 

§242.  Presentment;  how  made. — Presentment  for  acceptance  must 
be  made  by  or  on  behalf  of  the  holder  at  a  reasonable  hour,  on  a  busi- 
ness day,  and  before  the  bill  is  overdue,  to  the  drawee  or  some  per- 
son authorized  to  accept  or  refuse  acceptance  on  his  behalf;   and 

1.  Where  a  bill  is  addressed  to  two  or  more  drawees  who  are  not 
partners,  presentment  must  be  made  to  them  all,  unless  one  has  au- 
thority to  accept  or  refuse  acceptance  for  all,  in  which  case  present- 
ment may  be  made  to  him  only ; 


398  Bank  and  Trade  Acceptances 

2.  Where  the  drawee  is  dead,  presentment  may  be  made  to  his  per- 
sonal representative ; 

3.  Where  the  drawee  has  been  adjudged  a  bankrupt  or  an  insol- 
vent, or  has  made  an  assignment  for  the  benefit  of  creditors,  present- 
ment may  be  made  to  him  or  to  his  trustee  or  assignee. 

§243.  On  what  days  presentment  may  be  made. — A  bill  may  be  pre- 
sented for  acceptance  on  any  day  on  which  negotiable  instruments  may 
be  presented  for  payment  under  the  provisions  of  sections  one  hun- 
dred and  thirty-two  and  one  hundred  and  forty-five  of  this  act.  When 
Saturday  is  not  otherwise  a  holiday,  presentment  for  acceptance  may 
be  made  before  twelve  o'clock  noon  on  that  day. 

§244.  Presentment  where  time  is  insufficient. — Where  the  holder  of 
a  bill  drawn  payable  elsewhere  than  at  the  place  of  business  or  the 
residence  of  the  drawee  has  not  time  with  the  exercise  of  reasonable 
diligence  to  present  the  bill  for  acceptance  before  presenting  it  for 
payment  on  the  day  that  it  falls  due,  the  delay  caused  by  presenting 
the  bill  for  acceptance  before  presenting  it  for  payment  is  excused  and 
does  not  discharge  the  drawers  and  indorsers. 

§245.  Where  presentment  is  excused. — Presentment  for  acceptance 
is  excused  and  a  bill  may  be  treated  as  dishonored  by  non-acceptance 
in  either  of  the  following  cases : 

1.  Where  the  drawee  is  dead,  or  has  absconded,  or  is  a  fictitious 
person  or  a    person  not  having  capacity  to  contract  by  bill ; 

2.  Where  after  the  exercise  of  reasonable  diligence,  presentment 
cannot  be  made ; 

3.  Where,  although  presentment  has  been  irregular,  acceptance  has 
been  refused  on  some  other  ground. 

§246.  When  dishonored  by  non-acceptance. — A  bill  is  dishonored 
by  non-acceptance : 

1.  When  it  is  duly  presented  for  acceptance,  and  such  an  acceptance 
as  is  prescribed  by  this  act  is  refused  or  cannot  be  obtained ;  or 

2.  When  presentment  for  acceptance  is  excused  and  the  bill  is  not 
accepted. 

§247.  Duty  of  holder  where  bill  not  accepted. — Where  a  bill  is 
duly  presented  for  acceptance  and  is  not  accepted  within  the  pre- 


Commercial  Banking  and  Cpedits  399 

scribed  time,  the  person  presenting  it  must  treat  the  bill  as  dishonored 
by  non-acceptance  or  he  loses  the  right  of  recourse  against  the  drawer 
and  indorsers. 

§248.  Rights  of  holder  where  bill  not  accepted. — When  a  bill  is  dis- 
honored by  non-acceptance,  an  immediate  right  of  recourse  against  the 
drawers  and  indorsers  accrues  to  the  holder,  and  no  presentment  for 
payment  is  necessary. 

ARTICLE  XIII. 

Protest  of  Bills  of  Exchange. 

§260.  In  what  cases  protest  necessary. 


§261.  Protest 

§262.  Protest 

§263.  Protest 

§264.  Protest 


how  made. 

by  whom  made. 

when  to  be  made, 

where  made. 

§265.  Protest  both  for  non-acceptance  and  non-payment. 
§266.  Protest  before  maturity  where  acceptor  insolvent. 
§267.  When  protest  dispensed  with. 
§268.  Protest,  where  bill  is  lost,  et  cetera. 

§260.  In  what  cases  protest  necessary. — Where  a  foreign  bill  appear- 
ing on  its  face  to  be  such  is  dishonored  by  non-acceptance,  it  must  be 
duly  protested  for  non-acceptance,  and  where  such  a  bill  which  has  not 
previously  been  dishonored  by  non-acceptance  is  dishonored  by  non- 
payment, it  must  be  duly  protested  for  non-payment.  If  it  is  not  so 
protested,  the  drawer  and  indorsers  are  discharged.  Where  a  bill  docs 
not  appear  on  its  face  to  be  a  foreign  bill,  protest  thereof  in  case  of 
dishonor  is  unnecessary. 

§261.  Protest ;  how  made. — The  protest  must  be  annexed  to  the  bill, 
or  must  contain  a  copy  thereof,  and  must  be  under  the  hand  and  seal 
of  the  notary  making  it,  and  must  specify : 

1.  The  time  and  place  of  presentment; 

2.  The  fact  that  presentment  was  made  and  the  manner  thereof; 

3.  The  cause  or  reason  for  protesting  the  bill ; 

4.  The  demand  made  and  the  answer  given,  if  any,  or  the  fact  that 
the  drawee  or  acceptor  could  not  be  found. 


400  Bank  and  Trade  Acceptances 

§262.  Protest ;  by  whom  made. — Protest  may  be  made  by : 

1.  A  notary  public;    or 

2.  By  any  respectable  resident  of  the  place  where  the  bill  is  dishon- 
ored, in  the  presence  of  two  or  more  credible  witnesses. 

§263,  Protest;  when  to  be  made. — When  a  bill  is  protested,  such 
protest  must  be  made  on  the  day  of  its  dishonor,  unless  delay  is  ex- 
cused as  herein  provided.  When  a  bill  has  been  duly  noted,  the  pro- 
test may  be  subsequently  extended  as  of  the  date  of  the  noting. 

§264.  Protest;  where  made. — A  bill  must  be  protested  at  the  place 
where  it  is  dishonored,  except  that  when  a  bill  drawn  payable  at  the 
place  of  business  or  residence  of  some  person  other  than  the  drawee, 
has  been  dishonored  by  non-acceptance,  it  must  be  protested  for  non- 
payment at  the  place  where  it  is  expressed  to  be  payable,  and  no 
further  presentment  for  payment  to,  or  demand  on,  the  drawee  is 
necessary. 

§265.  Protest  both  for  non-acceptance  and  non-payment. — A  bill 
which  has  been  protested  for  non-acceptance  may  be  subsequently 
protested  for  non-payment. 

§266.  Protest  before  maturity  where  acceptor  insolvent. — ^Where  the 
acceptor  has  been  adjudged  a  bankrupt  or  an  insolvent,  or  has  made 
an  assignment  for  the  benefit  of  creditors,  before  the  bill  matures,  the 
holder  may  cause  the  bill  to  be  protested  for  better  security  against 
the  drawer  and  indorsers. 

§267.  When  protest  dispensed  with. — Protest  is  dispensed  with  by 
any  circumstances  which  would  dispense  with  notice  of  dishonor.  De- 
lay in  noting  or  protesting  is  excused  when  delay  is  caused  by  cir- 
cumstances beyond  the  control  of  the  holder  and  not  imputable  to  his 
default,  misconduct,  or  negligence.  When  the  cause  of  delay  ceases 
to  operate,  the  bill  must  be  noted  or  protested  with  reasonable  dili- 
gence. 

§268.  Protest  where  bill  is  lost,  et  cetera. — When  a  bill  is  lost  or 
destroyed  or  is  wrongfully  detained  from  the  person  entitled  to  hold  it, 
protest  may  be  made  on  a  copy  or  written  particulars  thereof. 


Commercial  Banking  and  Credits  401 

ARTICLE  XIV. 

Acceptance  of  Bills  of  Exchange  for  Honor. 

.  §380.  When  bill  may  be  accepted  for  honor. 
§281.  Acceptance  for  honor;    how  made. 

§282.  When  deemed  to  be  an  acceptance  for  honor  of  the  drawer. 
§283.  Liability  of  acceptor  for  honor. 
§284.  Agreement  of  acceptor  for  honor. 

§285.  Maturity  of  bill  payable  after  sight;   accepted  for  honor. 
§286.  Protest  of  bill  accepted  for  honor,  et  cetera. 
§287.  Presentment  for  payment  to  acceptor  for  honor;  hovv  made. 
§288.  When  delay  in  making  presentment  is  excused. 
§289.  Dishonor  of  bill  by  acceptor  for  honor. 

§280.  When  bill  may  be  accepted  for  honor. — ^Where  a  bill  of  ex- 
change has  been  protested  for  dishonor  by  non-acceptance  or  protested 
for  better  security  and  is  not  overdue,  any  person  not  being  a  party 
already  liable  thereon  may,  with  the  consent  of  the  holder,  intervene 
and  accept  the  bill  supra  protest  for  the  honor  of  any  party  liable 
thereon  or  for  the  honor  of  the  person  for  whose  account  the  bill  is 
drawn.  The  acceptance  for  honor  may  be  for  part  only  of  the  sum  for 
which  the  bill  is  drawn,  and  where  there  has  been  an  acceptance  for 
honor  for  one  party,  there  may  be  a  further  acceptance  by  a  different 
person  for  the  honor  of  another  party. 

§281.  Acceptance  for  honor;  how  made. — An  acceptance  for  honor 
supra  protest  must  be  in  writing  and  indicate  that  it  is  an  acceptance 
for  honor,  and  must  be  signed  by  the  acceptor  for  honor. 

§282.  When  deemed  to  be  an  acceptance  for  honor  of  the  drawer. — 
When  an  acceptance  for  honor  does  not  expressly  state  for  whose 
honor  it  is  made,  it  is  deemed  to  be  an  acceptance  for  the  honor  of 
the  drawer. 

§283.  Liability  of  acceptor  for  honor. — The  acceptor  for  honor  is  lia- 
ble to  the  holder  and  to  all  parties  to  the  bill  subsequent  to  the  party 
for  whose  honor  he  has  accepted. 

§284.  Agreement  of  acceptor  for  honor. — The  acceptor  for  honor 
by  such  acceptance  engages  that  he  will  on  due  presentment  pay  the 


402  Bank  and  Trade  Acceptances 

bill  according  to  the  terms  of  his  acceptance,  provided  it  shall  not  have 
been  paid  by  the  drawee,  and  provided  also  that  it  shall  have  been  duly- 
presented  for  payment  and  protested  for  non-payment  and  notice  of 
dishonor  given  to  him. 

§285.  Maturity  of  bill  payable  after  sight;  accepted  for  honor. — 
Where  a  bill  payable  after  sight  is  accepted  for  honor,  its  maturity 
is  calculated  from  the  date  of  the  noting  for  non-acceptance  and  not 
from  the  date  of  the  acceptance  for  honor. 

§286.  Protest  of  bill  accepted  for  honor,  at  cetera. — Where  a  dis- 
honored bill  has  been  accepted  for  honor  supra  protest  or  contains  a 
reference  in  case  of  need,  it  must  be  protested  for  non-payment  before 
it  is  presented  for  payment  to  the  acceptor  for  honor  or  refere  in  case 
of  need. 

§287.  Presentment  for  payment  to  acceptor  for  honor ;  how  made. — 
Presentment  for  payment  to  the  acceptor  for  honor  must  be  made  as 
follows : 

1.  If  it  is  to  be  presented  in  the  place  where  the  protest  for  non- 
payment was  made,  it  must  be  presented  not  later  than  the  day  fol- 
lowing its  maturity; 

2.  If  it  is  to  be  presented  in  some  other  place  than  the  place  where  it 
was  protested,  then  it  must  be  forwarded  within  the  time  specified  in 
section  one  hundred  and  seventy-five. 

§288.  When  delay  in  making  presentment  is  excused. — The  pro- 
visions of  section  one  hundred  and  forty-one  apply  where  there  is  de- 
lay in  making  presentment  to  the  acceptor  for  honor  or  referee  in  case 
of  need. 

§289.  Dishonor  of  bill  by  acceptor  for  honor. — When  the  bill  is  dis- 
honored by  the  acceptor  for  honor  it  must  be  protested  for  non-pay- 
ment by  him. 

ARTICLE  XV. 

Payment  of  Bills  of  Exchange  for  Honor. 

§300.  Who  may  make  payment  for  honor.  "- 

§301.  Payment  for  honor ;  how  made. 


Commercial  Banking  and  Credits  403 

§302.  Declaration  before  payment  for  honor, 

§303.  Preference  of  parties  offering  to  pay  for  honor. 

§304.  Effect  on  subsequent  parties  where  bill  is  paid  for  honor. 

§305.  Where  holder  refuses  to  receive  payment  supra  protest. 

§306.  Rights  of  payer  for  honor. 

§300.  Who  may  make  payment  for  honor. — Where  a  bill  has  been 
protested  for  non-payment,  any  person  may  intervene  and  pay  it  supra 
protest  for  the  honor  of  any  person  liable  thereon  or  for  the  honor  of 
the  person  for  whose  account  it  was  drawn. 

§301.  Payment  for  honor;  how  made. — The  payment  for  honor 
supra  protest  in  order  to  operate  as  such  and  not  as  a  mere  voluntary 
payment  must  be  attested  by  a  notarial  act  of  honor,  which  may  be 
appended  to  the  protest  or  form  an  extension  to  iL 

§302.  Declaration  before  payment  for  honor. — The  notarial  act  of 
honor  must  be  founded  on  a  declaration  made  by  the  payer  for  honor, 
or  by  his  agent  in  that  behalf  declaring  his  intention  to  pay  the  bill  for 
honor  and  for  whose  honor  he  pays. 

§303.  Preference  of  parties  offering  to  pay  for  honor. — Where  two 
or  more  persons  offer  to  pay  a  bill  for  the  honor  of  different  parties, 
the  person  whose  payment  will  discharge  most  parties  to  the  bill  is 
to  be  given  the  preference. 

§304.  Effect  on  subsequent  parties  where  bill  is  paid  for  honor. — 
Where  a  bill  has  been  paid  for  honor  all  parties  subsequent  to  the 
party  for  whose  honor  it  is  paid  are  discharged,  but  the  payer  for 
honor  is  subrogated  for,  and  succeeds  to,  both  the  rights  and  duties 
of  the  holder  as  regards  the  party  for  whose  honor  he  pays  and  all  par- 
ties liable  to  the  latter. 

§305.  Where  holder  refuses  to  receive  payment  supra  protest. — 
Where  the  holder  of  a  bill  refuses  to  receive  payment  supra  protest,  he 
loses  his  right  of  recourse  against  any  party  who  would  have  been 
discharged  by  such  payment. 

§306.  Rights  of  payer  for  honor. — The  payer  for  honor,  on  paying  to 
the  holder  the  amount  of  the  bill  and  the  notarial  expense  incidental 
to  its  dishonor,  is  entitled  to  receive  both  the  bill  itself  and  the 
protest. 


404  Bank  and  Trade  Acceptances 

ARTICLE  XVI. 

Bills  in  a  Set. 

§310.  Bills  in  sets  constitute  one  bill. 

§311.  Rights  of  holders  where  different  parts  are  negotiated. 

§312.  Liability  of  holder  who  indorses  two  or  more  parts  of  a  set 

to  different  persons. 
§313.  Acceptance  of  bills  drawn  in  sets. 
§314.  Payment  by  acceptor  of  bills  drawn  in  sets. 
§315.  Effect  of  discharging  one  of  a  set. 

§310.  Bills  in  sets  constitute  one  bill. — Where  a  bill  is  drawn  in  a 
set,  each  part  of  the  set  being  numbered  and  containing  a  reference  to 
the  other  parts,  the  whole  of  the  parts  constitutes  one  bill. 

§311.  Rights  of  holders  where  different  parts  are  negotiated. — 
Where  two  or  more  parts  of  a  set  are  negotiated  to  different  holders 
in  due  course,  the  holder  whose  title  first  accrues  is  as  between  such 
holders  the  true  owner  of  the  bill.  But  nothing  in  this  section  affects 
the  rights  of  a  person  who  in  due  course  accepts  or  pays  the  part 
first  presented  to  him. 

§312.  Liability  of  holder  who  indorses  two  or  more  parts  of  a  set  to 
different  persons. — Where  the  holder  of  a  set  indorses  two  or  more 
parts  to  different  persons  he  is  liable  on  every  such  part,  and  every 
indorser  subsequent  to  him  is  liable  on  the  part  he  has  himself  in- 
dorsed, as  if  such  parts  were  separate  bills. 

§313.  Acceptance  of  bills  drawn  in  sets. — The  acceptance  may  be 
written  on  any  part  and  it  must  be  written  on  one  part  only.  If  the 
drawee  accepts  more  than  one  part,  and  such  accepted  parts  are  nego- 
tiated to  different  holders  in  due  course,  he  is  liable  on  every  such  part 
as  if  it  were  a  separate  bill. 

§314.  Payment  by  acceptor  of  bills  drawn  in  sets. — When  the  ac- 
ceptor of  a  bill  drawn  in  a  set  pays  it  without  requiring  the  part  bear- 
ing his  acceptance  to  be  delivered  up  to  him,  and  that  part  at  maturity 
is  outstanding  in  the  hands  of  a  holder  in  due  course,  he  is  liable  to 
the  holder  thereon, 


Commercial  Banking  and  Cpedits  405 

§315.  Effect  of  discharging  one  of  a  set. — Except  as  herein  otherwise 
provided,  where  any  one  part  of  a  bill  drawn  in  a  set  is  discharged  by 
payment  or  otherwise  the  whole  bill  is  discharged. 

ARTICLE  XVII. 

Promissory  Notes  and  Checks. 

§320.  Promissory  note  defined. 

§321.  Check  defined. 

§322.  Within  what  time  a  check  must  be  presented. 

§323.  Certification  of  check;   effect  of. 

§324.  Effect  where  holder  of  check  procures  it  to  be  certified. 

§325.  When  check  operates  as  an  assignment. 

§326.  Recovery  of  forged  check. 

§320.  Promissory  note  defined. — A  negotiable  promissory  note  with- 
in the  meaning  of  this  act  is  an  unconditional  promise  in  writing  made 
by  one  person  to  another,  signed  by  the  maker,  engaging  to  pay  on 
demand  or  at  a  fixed  or  determinable  future  time  a  sum  certain  in 
money  to  order  or  to  bearer.  Where  a  note  is  drawn  to  the  maker's 
own  order,  it  is  not  complete  until  indorsed  by  him. 

§321.  Check  defined. — A  check  is  a  bill  of  exchange  drawn  on  a 
bank,  payable  on  demand.  Except  as  herein  otherwise  provided,  the  pro- 
visions of  this  act  applicable  to  a  bill  of  exchange  payable  on  demand 
apply  to  a  check. 

§322.  Within  what  time  a  check  must  be  presented. — A  check  must 
be  presented  for  payment  within  a  reasonable  time  after  its  issue  or 
the  drawer  will  be  discharged  from  liability  thereon  to  the  extent  of 
the  loss  caused  by  the  delay. 

§323.  Certification  of  check;  effect  of. — Where  a  check  is  certified 
by  the  bank  on  which  it  is  drawn  the  certification  is  equivalent  to  an 
acceptance. 

§324.  Effect  where  the  holder  of  check  procures  it  to  be  certified. — 
Where  the  holder  of  a  check  procures  it  to  be  accepted  or  certified  the 
drawer  and  all  indorsers  are  discharged  from  liability  thereon. 


4o6  Bank  and  Trade  Acceptances 

§325.  When  check  operates  as  an  assignment. — A  check  of  itself 
does  not  operate  as  an  assignment  of  any  part  of  the  funds  to  the 
credit  of  the  drawer  with  the  bank,  and  the  bank  is  not  liable  to  the 
holder,  unless  and  until  it  accepts  or  certifies  the  check, 

§326.  Recovery  of  forged  check. — No  bank  shall  be  liable  to  a  de- 
positor for  the  payment  by  it  of  a  forged  or  raised  check,  unless  within 
one  year  after  the  return  to  the  depositor  of  the  voucher  of  such  pay- 
ment, such  depositor  shall  notify  the  bank  that  the  check  so  paid  was 
forged  or  raised. 

ARTICLE  XVIII. 

Notes  Given  for  Patent  Rights  and  for  a  Speculative 

Consideration. 

This  Article  appears  only  in  New  York  and  Ohio  Jets 

§330.  Negotiable  instruments  given  for  patent  rights. 

§331.  Negotiable  instruments  given  for  a  speculative  consideration. 

§332.  How  negotiable  bonds  are  made  non-negotiable. 

§330.  Negotiable  instruments  given  for  patent  rights. — A  promis- 
sory note  or  other  negotiable  instrument,  the  consideration  of  which 
consists  wholly  or  partly  of  the  right  to  make,  use  or  sell  any  inven- 
tion claimed  or  represented  by  the  vendor  at  the  time  of  sale  to  be 
patented,  must  contain  the  words  "given  for  a  patent  right"  prom- 
inently and  legibly  written  or  printed  on  the  face  of  such  note  or 
instrument  above  the  signature  thereto ;  and  such  note  or  instrument 
in  the  hands  of  any  purchaser  or  holder  is  subject  to  the  same  defenses 
as  in  the  hands  of  the  original  holder;  but  this  section  does  not  apply 
to  a  negotiable  instrument  given  solely  for  the  purchase  price  or  the 
use  of  a  patented  article. 

§331.  Negotiable  instruments  for  a  speculative  consideration. — If  the 
consideration  of  a  promissory  note  or  other  negotiable  instrument  con- 
sists in  whole  or  in  part  of  the  purchase  price  of  any  farm  product,  at 
a  price  greater  by  at  least  four  times  than  the  fair  market  value  of  the 
same  product  at  the  time,  in  the  locality,  or  of  the  membership  and 
rights  in  an  association,  company  or  combination  to  produce  or  sell 


CoMMEPciAL  Banking  and  Credits  407 

any  farm  product  at  a  fictitious  rate,  or  of  a  contract  or  bond  to  pur- 
chase or  sell  any  farm  product  at  a  price  greater  by  four  times  than 
the  market  value  of  the  same  product  at  the  time  in  the  locality,  the 
words,  "given  for  a  speculative  consideration,"  or  other  words  clearly 
showing  the  nature  to  the  consideration,  must  be  prominently  and 
legibly  written  or  printed  on  the  face  of  such  note  or  instrument  above 
the  signature  thereof;  and  such  note  or  instrument,  in  the  hands  of 
any  purchaser  or  holder,  is  subject  to  the  same  defenses  as  in  the 
hands  of  the  original  owner  or  holder. 

§332.  How  negotiable  bonds  are  made  non-negotiable. — The  owner 
or  holder  of  any  corporate  or  municipal  bond  or  obligation  (except 
such  as  are  designated  to  circulate  as  money,  payable  to  bearer)  here- 
tofore or  hereafter  issued  and  payable  in  this  State,  but  not  registered 
in  pursuance  of  any  State  law,  may  make  such  bond  or  obligation,  or 
the  interest  coupon  accompanying  the  same,  non-negotiable,  by  sub- 
scribing his  name  to  a  statement  indorsed  thereon  that  such  bond, 
obligation  or  coupon  is  his  property ;  and  thereon  the  principal  sum 
therein  mentioned  is  payable  only  to  such  owner  or  holder,  or  his  legal 
representatives  or  assigns,  unless  such  bond,  obligation  or  coupon  be 
transferred  by  indorsement  in  blank,  or  payable  to  bearer,  or  to  order, 
with  the  addition  of  the  assignor's  place  of  residence. 

DIGEST  OF  THE  FEDERAL  BILL  OF  LADING  ACT 

Its  Importance  in  Interstate  and  Foreign  Commerce — Origin  of 

Federal  Bill  of  Lading  Act 

Considered  second  only  in  commercial  importance  to  the  Federal 
Reserve  Act  is  the  Federal  Bill  of  Lading  Act,  otherwise  known  as  the 
Pomerene  Bill,  which  came  into  effect  the  first  day  of  January,  1917. 
With  its  passage,  bills  of  lading  were  transformed  from  simple  con- 
tracts of  shipment  into  important  negotiable  instruments,  and  the  con- 
ditions under  which  they  may  be  issued,  are  fully  prescribed.  Pre- 
vious to  that  date,  the  bill  of  lading,  which  is  the  documentary  evidence 
of  the  shipment  of  goods  from  producer  to  consumer,  afforded  no  secu- 
rity of  any  kind  to  the  banker  who  advanced  money  thereon. 

For  a  long  time  prior  to  the  passage  of  the  Pomerene  bill,  a  con- 
tinued want  was  felt  for  legislation  which  would  transform  the  bill 
of  lading  into  a  negotiable  instrument,  thereby  rendering  it  capable 


4o8  Bank  and  Trade  Acceptances 

of  being  transferred  in  the  same  manner  as  a  check  ©r  other  com- 
mercial paper  with  its  attendant  advantages  to  the  holder.  The  vari- 
ous commercial  bodies  of  the  country,  principally,  the  Committee  of 
the  American  Bankers  Association,  after  an  energetic  campaign  to 
bring  about  such  legislation,  v^rere  instrumental  in  having  passed, 
by  various  States  of  the  Union,  from  time  to  time,  what  is  known  as 
the  "Uniform  Bill  of  Lading  Act",  the  purposes  of  which  closely  re- 
semble the  Pomerene  bill.  However,  Acts  known  as  the  "Uniform 
Bill  of  Lading  Act"  enacted  by  the  Legislatures  of  such  States  and 
adopted  in  whole  or  in  part  by  some  others,  were  found  to  be  at 
variance  with  the  requirements  of  a  fundamentally  sound  document, 
and  were  far  from  uniform. 

IMPORTANCE  OF  BILL  OF  LADING  GREATLY  INCREASED 

BY  ACT 

The  Federal  Bill  of  Lading  Act,  however,  brought  about  a  complete 
change  in  the  bill  of  lading,  which,  as  a  receipt  for  goods  delivered, 
represents  ownership  as  well,  and  is  the  basis  of  acceptance  in  bills  of 
exchange,  both  domestic  and  foreign. 

IMPORTANT  FEATURES  OF  THE  FEDERAL  BILL  OF 

LADING  ACT 

The  Federal  Bill  of  Lading  Act  contains  the  following  important 
features : 

1.  Provision  is  made  for  a  uniform  bill  of  lading. 

2.  Bills  of  lading  are  made  easily  and  safely  negotiable. 

3.  The  burden  of  responsibility  is  shifted  from  the  bank  to  the 

carrier. 

4.  Fraudulent  practices  in  connection  with  bills  of  lading  are 

made  criminal  and  punishment  provided  therefor. 

DIGEST  OF  THE  FEDERAL  BILL  OF  LADING  ACT 

A  digest  of  this  Act  follows : 

§1.  Jurisdiction. — This  Act  exercises  jurisdiction  over  bills  of  lading 
issued  by  any  common  carrier  for  the  transportation  of  goods : 

(a)  Within  any  territory  of  the  United  States  or  the  District 
of  Columbia. 


Commercial  Banking  and  Credits  4019 

(b)  From  a  State  to  a  foreign  country. 

(c)  From  one  State  to  another  State. 

(d)  Between  points  in  the  same  State  through  another  State 

or  through  a  foreign  country. 

§§2  and  3.  Kinds  of  bills  to  be  used. — 

(a)  Straight  bill. 

(b)  Order  bill. 

A  straight  bill  is  one  in  which  it  is  stated  that  the  goods  are  con- 
signed or  destined  to  a  specified  person.  Such  bills  are  non-negotia- 
ble and  must  be  so  marked. 

An  order  bill  is  one  in  which  it  is  stated  that  the  goods  are  consigned 
or  destined  to  the  order  of  any  person  named.  Such  bills  are  always 
negotiable.  Any  provision  in  an  order  bill  to  the  effect  that  it  is 
non-negotiable  shall  be  void  and  shall  not  affect  its  negotiability  un- 
less made  non-negotiable  by  the  shipper  in  agreement  in  writing. 

§4.  Order  bills  not  to  be  issued  in  part  or  sets. — Order  bills  may  not 
be  issued  in  parts  or  sets,  except  in  the  case  of  shipments  to  Alaska 
and  Panama,  and  if  so  issued,  the  carrier  will  be  held  liable  to  anyone 
who  purchases  a  part  for  value,  in  good  faith,  even  though  such  pur- 
chase is  made  after  delivery  of  the  goods.  The  provisions  contained 
in  this  Section,  however,  do  not  forbid  the  issuance  of  order  bills  in 
parts  or  sets  for  the  transportation  of  goods  to  Alaska,  Panama,  Por- 
to Rico,  Philippines,  Hawaii  or  other  foreign  countries. 

§5.  Duplicate  necessary  when  more  than  one  issued. — In  the  issu- 
ance of  dupHcate  order  bills  for  the  transportation  of  goods  to  anv 
place  in  the  United  States  or  on  the  continent  of  North  America,  excep^ 
Alaska,  and  Panama,  the  word  "duplicate"  must  be  so  marked  plainly 
upon  their  face. 

§6.  Straight  bill;  how  to  be  marked. — A  straight  bill  shall  have 
plainly  upon  its  face  by  the  carrier  issuing  it  "non-negotiable"  or 
"not  negotiable." 

§7.  Effect  of  insertion  of  name  of  person  to  be  notified. — THe  inser- 
tion of  the  name  of  a  person  to  be  notified  of  the  arrival  of  thv  goods 
shall  not  limit  the  negotiability  of  order  bills. 


410  Bank  and  Trade  Acceptances 

§8.  Carrier  compelled  to  make  delivery  in  absence  of  lawful  excuse. — 
A  carrier  in  the  absence  of  some  lawful  excuse,  is  bound  to  deliver 
goods  upon  a  demand  made  by  the  consignee  named  in  the  bill  for 
the  goods  (straight  bill)  ;  or,  if  the  bill  is  an  order  bill,  by  the  holder 
thereof.     In  the  latter  case  such  a  demand  should  be  accompanied  by: 

(a)  An  offer  to  satisfy  the  carrier's  lawful  lien  upon  the  goods. 

(b)  An  offer  to  surrender  the  bill  properly  endorsed. 

(c)  A  readiness  and  willingness  to  sign  an  acknowledgment  for 

the  delivery  of  the  goods, 

and  in  case  of  the  carrier's  refusal  or  failure  to  deliver  the  goods  in 
compliance  with  the  demand  by  the  consignee  or  holder  of  the  bill, 
the  burden  of  establishing  the  existence  of  a  lawful  excuse  shall  be 
upon  the  carrier. 

§9.  When  carrier  is  justified  in  making  delivery. — A  carrier  is  justi- 
fied in  making  delivery  to: 

(a)  One  who  is  a  person  lawfully  entitled  to  the  possession 

of  the  goods. 

(b)  A  consignee  named  in  a  straight  bill. 

(c)  A  person  possessing  an  order  bill  stating  that  the  goods 

are  to  be  delivered  to  his  order,  or  which  has  been  in- 
dorsed to  him  or  in  blank  by  the  consignee. 

§10.  Liability  of  carrier  when  delivery  made  to  person  not  entitled 
to  goods. — That  where  a  carrier  delivers  goods  to  one  who  is  not  law- 
fully entitled  to  the  possession  of  them,  the  carrier  shall  be  liable  to 
anyone  having  a  right  of  property  or  possession  in  the  goods  if  he 
delivered  the  goods  otherwise  than  as  authorized  by  subdivisions  (b) 
and  (c)  of  the  preceding  section ;  and,  though  he  delivered  the  goods 
as  authorized  by  either  of  said  subdivisions,  he  shall  be  so  liable  if 
prior  to  such  delivery  he 

(a)  Had  been  requested,  by  or  on  behalf  of  a  person  having  a 

right  of  property  or  possession  in  the  goods,  not  to  make 
such  delivery,  or 

(b)  Had  information  at  the  time  of  the  delivery  that  it  was  to 

a  person  not  lawfully  entitled  to  the  possession  of  the 
goods. 

Such  request  or  information,  to  be  effective  within  the  meaning  of 
this  section,  must  be  given  to  an  officer  or  agent,  of  the  carrier,  the 


Commercial  Banking  AND  Cf£dits  411 

actual  or  apparent  scope  of  whose  duties  includes  action  upon  such  a 
request  or  information,  and  must  be  given  in  time  to  enable  the  officer 
or  agent  to  whom  it  is  given,  acting  with  reasonable  diligence,  to 
stop  delivery  of  the  goods. 

§11.  Liability  of  carrier  arising  out  of  failure  to  cancel  order  bill. — 
A  carrier  will  be  held  liable  if  it  fails  to  cancel  an  order  bill  on  delivery, 
except  when  compelled  by  legal  process,  and  if  such  bill  is  later  ac- 
quired for  value  and  in  good  faith. 

§12.  Liability  of  carrier  when  making  partial  delivery. — A  carrier 
will  be  held  liable  in  cases  of  partial  delivery,  except  when  compelled 
by  legal  process  or  failure  to  take  up  and  cancel  the  bill  or  mark  the 
bill  with  a  description  of  the  partial  delivery,  or  if  such  bill  is  later  ac- 
quired for  value  and  in  good  faith. 

§13.  Alterations,  additions  or  erasures. — Any  bill  which  is  in  any 
way  altered,  added  to  or  erased,  without  authority  of  the  carrier,  will 
be  void. 

§14.  When  an  order  bill  is  lost,  stolen  or  destroyed. — When  a  bill  is 
lost,  stolen  or  destroyed,  a  Court  of  competent  jurisdiction  may  order 
the  delivery  of  the  goods  upon  satisfactory  proof  of  such  loss  upon  the 
giving  of  an  indemnifying  bond.  In  such  a  case  the  carrier's  costs 
and  counsel  fees  must  be  paid.  Liability  of  the  carrier  is  not  avoided 
in  case  such  an  order  bill  has  been  negotiated  for  value  without  notice 
of   delivery. 

§15.  Liability  of  carrier  when  bill  marked  "duplicate." — A  bill 
marked  "duplicate"  makes  the  carrier  liable  to  the  extent  only  of  de- 
claring that  it  is  a  true  copy  of  the  original. 

§18.  When  carrier  is  liable  for  non-delivery. — The  carrier  will  be 
liable  for  non-delivery  when  the  title  has  not  been  transferred  by  the 
consignee  to  carrier  or  when  the  carrier  has  no  lien  on  the  goods. 

§15.  When  more  than  one  claims  title  to  goods. — When  one  or  more 
persons  claim  title  to  the  goods,  the  carrier  may  require  all  known 
claimants  to  interplead  either  as  a  defense  to  an  action  for  non-deliv- 
ery or  as  an  original  suit. 


412  Bank  and  Trade  Acceptances 

« 

§18.  When  carrier  not  liable  for  non-delivery  of  goods. — A  carrier 

is  not  liable  for  the  non-delivery  of  goods  if  he  has  knowledge  of  some 
person  other  than  the  consignee  or  holder  of  the  bill,  who  has  a  claim, 
and  will  be  excused  from  liability  for  refusing  to  deliver  the  goods 
until  he  has  had  a  reasonable  time  to  ascertain  the  validity  of  the  ad- 
verse claim. 

§19.  Carrier  not  liable  for  any  other  circumstances  in  non-delivery. — 
Under  no  other  circumstances  than  those  noted  in  the  preceding  sec- 
tion, can  a  carrier  be  held  liable  for  non-delivery. 

§20.  Liability  for  quantity  and  quality  of  shipment. — When  goods 
are  loaded  by  a  carrier,  it  shall  count  the  package  freight  and  ascertain 
the  kind  and  quantity  of  bulk  freight.  Insertions  in  the  bill  that  it  is 
the  shipper's  weight,  load  and  count  will  be  held  to  be  void. 

§21.  Liability  of  carrier  in  loading. — When  goods  are  loaded  by  the 
shipper  and  the  bill  states  that  it  is  the  shipper's  weight,  load  and 
count,  the  carrier  must  ascertain  the  kind  and  quantity  of  goods,  and  is 
not  liable  for  the  improper  loading  or  the  misdescription  of  goods  in 
the  bill  of  lading.  In  the  case  of  a  carrier  having  facilities  at  hand  and 
the  shipment  being  in  bulk  and  requests  being  made  in  writing,  the 
shipper's  weight,  load  and  count  may  be  verified  by  the  carrier's  agent. 
The  shipper's  weight  shall  then  not  be  inserted  in  the  bill. 

§22.  Liability  of  carrier  when  bill  is  issued  by  authorized  agent. — 

When  a  bill  is  issued  by  an  agent  of  actual  or  apparent  authority,  the 
carrier  is  liable  to  the  owner  of  the  goods  covered  in  a  straight  bill  or 
to  the  bona  fide  holder  for  value  of  an  order  bill,  although  the  goods 
are  not  received  by  the  carrier  or  are  misdirected. 

§23.  Rights  of  debtors  and  creditors. — While  goods  are  in  posses- 
sion of  a  carrier,  they  may  not  be  attached  by  garnishment  or  other- 
wise unless  a  bill  is  first  surrendered  to  the  carrier  or  its  negotiation  is 
enjoined. 

§24.  When  creditor  is  entitled  to  aid  of  courts  against  debtor. — 
A  creditor,  whose  debtor  is  the  owner  of  an  order  bill,  shall  be  entitled 
to  the  aids  of  Courts  of  jurisdiction  in  attaching  such  bill. 


Commercial  Banking  and  Cpedits  413 

§25,  When  lien  on  goods  for  payment  of  freight  arises. — When  an 

order  bill  is  issued,  a  carrier  has  a  lien  on  the  goods  for  all  transpor- 
tation and  delivery  charges. 

§26.  When  carrier  not  liable  for  non-delivery. — A  carrier  will  not  be 
held  liable  for  non-delivery  after  the  goods  have  been  lawfully  sold 
to  satisfy  the  carrier's  lien,  and  when  goods  have  not  been  claimed  or 
when  goods  are  perishable  or  hazardous. 

§§27,  28,  29  and  30.  Negotiation  and  transfer  of  bills.— A  bill  may  be 
negotiated : 

1.  By  the  delivery  to  an  indorsee  of  an  order  bill,  the  indorse- 

ment of  an  order  bill  in  such  case  being  required  to  be  made 
by  a  person  to  whose  order  the  goods  are  deliverable. 

2.  Such  indorsement  may  be  in  blank  or  to  a  specified  person 

and  subsequent  indorsements  must  be  in  like  manner. 

3.  The  transference  of  bills  may  be  accompanied  with  an  ex- 

press or  implied  agreement  to  transfer  the  title  to  the  bill 
or  to  the  goods  represented  thereby.  A  straight  bill,  how- 
ever, cannot  be  negotiated  free  from  existing  equities. 

4.  An  order  bill  may  be  negotiated  by  any  person  possessing 

same,  if  the  bill  requires  the  carrier  to  deliver  goods  to  the 
order  of  such  person  or  is  in  such  form  that  it  may  be  nego- 
tiated by  delivery. 

§§31  and  32.  Rights  under  transfer  and  negotiation. — These  Sec- 
tions regulate  the  rights  of  persons  and  parties  under  transfer  and 
negotiation  of  bills.  A  person  to  whom  a  bill  has  been  negotiated  ac- 
quires thereby  such  a  title  to  the  goods  as  the  person  negotiating  the 
bill  had  or  the  consignee  and  consignor  had.  A  person  to  whom  a 
bill  has  been  transferred  but  not  negotiated  acquires  as  against  the 
transferor  the  title  to  the  goods,  and  if  it  is  a  straight  bill,  such  per- 
son has  a  right  to  notify  the  carrier  and  becomes  direct  obligee  of  the 
carrier's  obligations.  A  transfer  of  the  bill  may  be  defeated  by  gar- 
nishment proceedings  by  a  creditor  by  prior  notification  of  the  carrier, 
the  notification  being  required  to  be  made  to  a  proper  agent  of  the 
carrier  and  within  a  reasonable  time. 

§33.  Where  order  bill  is  transferred  for  value  by  delivery. — Where 
an  order  bill  is  transferred  for  value  by  delivery,  the  transferee  ac- 
quires a  right  against  a  transferor  to  compel  him  to  indorse  the  bill, 
when  such  is  essential  for  negotiation. 


414  Bank  and  Trade  Acceptances 

§§34,  35  and  36.  Liability  of  person  who  negotiates  or  transfers  a 
bill. — A  person  negotiating  or  transferring  bills  by  indorsement,  war- 
rants that  the  bill  is  genuine ;  that  he  has  a  legal  right  to  transfer  it ; 
that  he  knows  of  no  fact  which  might  impair  the  validity  or  worth  of 
the  bill,  and  that  he  has  a  right  to  transfer  the  title  to  the  goods.  The 
indorser  of  the  bill  is  not  liable  for  the  obligations  of  prior  indorsers  or 
the  carrier.  A  mortgagee,  pledgee  or  holder  demanding  payment  of  a 
debt  does  not  thereby  warrant  the  genuineness  of  such  bill  held  as 
security,  or  quantity  or  quality  of  goods. 

§§37,  38,  39  and  40.  Rights  of  holders  of  bills.— The  validity  of 
title  is  not  impaired  when  received  in  good  fatih,  for  value,  even 
though  negotiation  was  a  breach  of  duty,  or  in  the  case  of  the  owner 
having  been  deprived  of  such  bill  by  fraud,  accident,  mistake,  duress, 
loss,  theft  or  conversion. 

Negotiation  in  the  case  of  a  person  who  has  sold,  mortgaged  or 
pledged  goods  which  are  in  the  carrier's  possession  or  who  has  sold, 
mortgaged,  or  pledged  the  order  bill,  but  continued  in  possession  of 
same,  is  not  considered  to  have  been  effected  from  the  first  purchaser 
to  the  last  holder.  The  rights  of  a  purchaser  of  an  order  bill  in  good 
faith  and  for  value,  to  whom  such  bill  has  been  negotiated,  shall  not 
be  defeated  by  the  seller's  lien  or  right  of  stoppage  in  transitu,  whether 
such  negotiation  be  prior  or  subsequent  to  notification  to  the  carrier 
of  the  seller's  claim.  The  carrier  shall  not  be  obliged  to  deliver  goods 
to  an  unpaid  seller  unless  the  bill  is  first  surrendered  for  cancellation. 
Except  as  above  noted,  no  right  of  a  mortgagee  or  lien  holder  is  limited 
as  against  a  purchaser  of  a  bill  for  value  and  in  good  faith. 

§41.  Forgeries,  etc. — Forgeries  are  to  be  adjudged  misdemeanors 
punishable  by  imprisonment  not  exceeding  five  years  or  by  fine  not 
exceeding  five  thousand  dollars  or  both,  where  a  person  with  intent  to 
defraud,  falsely  makes,  alters,  forges,  counterfeits,  prints  or  photo- 
graphs any  bill  of  lading  or  publishes  as  genuine  any  such  forged  bill 
or  aids  in  its  forging. 

§42.  Definitions. — Section  42  defines  the  following: 

"Action"  includes  counterclaim,  set  off  and  suit  in  equity. 
"Bill"  means  bill  of  lading  governed  by  this  Act. 
"Consignee"  means  the  person  named  in  the  bill  as  the  person 
to  whom  delivery  of  the  goods  is  to  be  made. 


Commercial  Banking  and  Cpedits  415 

"Consignor"  means  the  person  named  in  the  bill  as  the  person 
from  whom  the  goods  have  been  received  for  shipment. 

"Goods"  means  merchandise  or  chattels  in  course  of  transporta- 
tion or  which  have  been  or  are  about  to  be  transported. 

"Holder  of  a  bill"  means  a  person  who  has  both  actual  posses- 
sion of  such  bill  and  a  right  to  property  therein. 

"Order"  means  an  order  by  indorsement  on  the  bill. 

"Person"  includes  a  corporation  or  partnership  or  two  or  more 
persons  having  a  joint  or  common  interest. 

"To  purchase"  includes  to  take  as  mortgagee  and  to  take  as 
pledgee. 

"State"  includes  any  territory,  district,  insular  possession  or 
isthmian  possession. 

§§43  and  44.  Effectiveness  of  Act. — The  provisions  of  this  Act  do 
not  apply  to  bills  made  and  delivered  prior  to  the  taking  effect  thereof, 
and  such  section  and  part  of  this  Act  is  independent  and  severable, 
whereby  one  part,  if  declared  void,  does  not  invalidate  the  remainder 
of  the  Act. 

§45.  Takes  effect  January  1st,  1917. — This  Section  prescribes  that 
this  Act  shall  take  effect  on  January  1st,  1917. 

UNITED  STATES  WAREHOUSE  ACT 

The  United  States  Warehouse  Act  and  its  Importance  to  the  Bank 

Acceptance 

The  United  States  Warehouse  Act  is  given  here  in  full  as  a  refer- 
ence aid  to  the  treatise  on  Acceptances.  Since  Bank  Acceptances  se- 
cured by  warehouse  receipts  covering  staple  commodities,  are  one  of 
the  three  eligible  for  rediscount,  a  study  of  the  Act  and  the  provisions 
which  have  greatly  improved  the  financial  standing  of  warehouse  re- 
ceipts, is  recommended. 

Features  of  the  United  States  Warehouse  Act 

The  new  United  States  Warehouse  Law,  approved  Aug.  11,  1916, 
provides  for  the  issuance  of  licenses  by  the  Secretary  of  Agriculture, 
for  the  operation  of  warehouses  for  the  storage  of  agricultural  prod- 
ucts. The  license  brings  the  operation  of  the  warehouse  for  which  it 
is  issued  under  an  inspection  service  to  be  maintained  by  the  Depart- 


4^6  Bank  and  Trade  Acceptances 

ment  of  Agriculture,  and  makes  it  incumbent  for  the  licensee  to  give 
a  bond  in  a  sum  fixed  by  the  Secretary  of  Agriculture  for  the  faith- 
ful discharge  of  his  obligations  to  the  owners  of  commodities  placed 
in  his  custody.  The  inspection  service  includes  an  examination  of 
the  v^arehouse  before  the  license  is  issued,  and  from  time  to  time,  to 
determine  whether  it  is  suitable  for  the  purpose,  and  the  practice  and 
competency  of  the  warehouseman  in  classifying  according  to  grade 
and  otherwise,  weighing  and  certification  of  products,  etc.  The  bond 
is  a  guaranty  of  faithful  observance  of  State  as  well  as  Federal  laws 
governing  warehouse  operations.  An  appropriation  of  $50,000  is  made 
to  defray  the  expenses  of  the  Department  of  Agriculture  in  connection 
with  this  service  for  one  year. 

UNITED  STATES  WAREHOUSE  ACT 

§1.  Short  title. — That  this  Act  shall  be  known  by  the  short  title 
of  "United  States  Warehouse  Act." 

§2.  Definitions  of  terms  used  in  Act. — That  the  term  "warehouse" 
as  used  in  this  Act  shall  be  deemed  to  mean  every  building,  structure, 
or  other  protected  inclosure  in  which  any  agricultural  product  is  or 
may  be  stored  for  interstate  or  foreign  commerce,  or,  if  located  within 
any  place  under  the  exclusive  jurisdiction  of  the  United  States,  in 
which  any  agricultural  product  is  or  may  be  stored.  The  term  "ag- 
ricultural product"  wherever  used  in  this  Act  shall  be  deemed  to  mean 
cotton,  wool,  grains,  tobacco,  and  flaxseed,  or  any  of  them.  As  used 
in  this  Act,  "person"  includes  a  corporation  or  partnership  or  two  or 
more  persons  having  a  joint  or  common  interest;  "warehouseman" 
means  a  person  lawfully  engaged  in  the  business  of  storing  agricultural 
products ;   and  "receipt"  means  a  warehouse  receipt. 

§3.  Powers  of  Secretary  of  Agriculture  under  Act. — That  the  Secre- 
tary of  Agriculture  is  authorized  to  investigate  the  storage,  warehous- 
ing, classifying  according  to  grade  and  otherwise,  weighing,  and  cer- 
tification of  agricultural  products;  upon  application  to  him  by  any 
person  applying  for  license  to  conduct  a  warehouse  under  this  Act,  to 
inspect  such  warehouse  or  cause  it  to  be  inspected ;  at  any  time,  with 
or  without  application  to  him,  to  inspect  or  cause  to  be  inspected  all 
warehouses  licensed  under  this  Act;  to  determine  whether  ware- 
houses for  which  licenses  are  applied  for  or  have  been  issued  under 


Commercial  Banking  and  Cfedits  417 

this  Act  are  suitable  for  the  proper  storage  of  any  agricultural  product 
or  products ;  to  classify  warehouses  licensed  or  applying  for  a  license 
in  accordance  with  their  ownership,  location,  surroundings,  capacity, 
conditions,  and  other  qualities,  and  as  to  the  kinds  of  licenses  issued 
or  that  may  be  issued  for  them  pursuant  to  this  Act;  and  to  prescribe, 
within  the  limitations  of  this  Act,  the  duties  of  the  warehousemen 
conducting  warehouses  licensed  under  this  Act  with  respect  to  their 
care  of  and  responsibility  for  agricultural  products  stored  therein. 

§4.  Issuance  of  license  by  the  Secretary  of  Agriculture. — That  the 
Secretary  of  Agriculture  is  authorized,  upon  application  to  him,  to 
issue  to  any  warehouseman  a  license  for  the  conduct  of  a  warehouse  or 
warehouses  in  accordance  with  this  Act  and  such  rules  and  regulations 
as  may  be  made  hereunder;  PROVIDED,  That  each  such  warehouse 
be  found  suitable  for  the  proper  storage  of  the  particular  agricultural 
product  or  products  for  which  a  license  is  applied  for,  and  that  such 
warehouseman  agree,  as  a  condition  to  the  granting  of  the  license,  to 
comply  with  and  abide  by  all  the  terms  of  this  Act  and  the  rules  and 
regulations  prescribed  hereunder. 

§5.  Period  of  issuance  of  license. — That  each  license  issued  under 
sections  four  and  nine  of  this  Act  shall  be  issued  for  a  period  not  ex- 
ceeding one  year  and  shall  specify  the  date  upon  which  it  is  to  ter- 
minate, and  upon  showing  satisfactory  to  the  Secretary  of  Agriculture, 
may  from  time  to  time  be  renewed  or  extended  by  a  written  instru- 
ment, which  shall  specify  the  date  of  its  termination. 

§6.  Warehouseman  required  to  file  bond  to  secure  faithful  perform- 
ance of  his  obligations. — That  each  warehouseman  applying  for  a  li- 
cense to  conduct  a  warehouse  in  accordance  with  this  Act,  shall,  as  a 
condition  to  the  granting  thereof,  execute  and  file  with  the  Secretary 
of  Agriculture  a  good  and  sufficient  bond  other  than  personal  secu- 
rity to  the  United  States  to  secure  the  faithful  performance  of  his  ob- 
ligations as  a  warehouseman  under  the  laws  of  the  State,  District,  or 
Territory  in  which  he  is  conducting  such  warehouse,  as  well  as  under 
the  terms  of  this  Act  and  the  rules  and  regulations  prescrbied  here- 
under, and  of  such  additional  obligations  as  a  warehouseman  as  may 
be  assumed  by  him  under  contracts  with  the  respective  depositors  of 
agricultural  products  in  such  warehouse.  Said  bond  shall  be  in  such 
form  and  amount,  shall  have  such  surety  or  sureties,  subject  to  service 


4i8  Bank  and  Trade  Acceptances 

of  process  in  suits  on  the  bond  within  the  State,  District,  or  Terri- 
tory in  which  the  warehouse  is  located,  and  shall  contain  such  terms 
and  conditions  as  the  Secretary  of  Agriculture  may  prescribe  to  carry 
out  the  purposes  of  this  Act,  including  the  requirements  of  fire  insur- 
ance. Whenever  the  Secretary  of  Agriculture  shall  determine  that  a 
bond  approved  by  him  is,  or  for  any  cause  has  become,  insufficient,  he 
may  require  an  additional  bond  or  bonds  to  be  given  by  the  ware- 
houseman concerned,  conforming  with  the  requirements  of  this  sec- 
tion, and  unless  the  same  be  given  within  the  time  fixed  by  a  written 
demand  therefor,  the  license  of  such  warehouseman  may  be  suspended 
or  revoked. 

§7.  Person  injured  by  breach  of  any  obligation  may  sue  on  the 
bond. — That  any  person  injured  by  the  breach  of  any  obligation  to 
secure  which  a  bond  is  given,  under  the  provisions  of  sections  six  or 
nine,  shall  be  entitled  to  sue  on  the  bond  in  his  own  name  in  any  court 
of  competent  jurisdiction  to  recover  the  damages  he  may  have  sustain- 
ed by  such  breach. 

§8.  When  warehouse  is  bonded. — That  upon  the  filing  with  and 
approval  by  the  Secretary  of  Agriculture  of  a  bond,  in  compliance  with 
this  Act,  for  the  conduct  of  a  warehouse,  such  warehouse  shall  be 
designated  as  bonded  hereunder;  but  no  warehouse  shall  be  desig- 
nated as  bonded  under  this  Act,  and  no  name  or  description  conveying 
the  impression  that  it  is  so  bonded,  shall  be  used,  until  a  bond,  such  as 
provided  for  in  section  six,  has  been  filed  with  and  approved  by  the 
Secretary  of  xA.griculture,  nor  unless  the  license  issued  under  this  Act 
for  the  conduct  of  such  warehouse  remains  unsuspended  and  unre- 
voked. 

§9.  When  license  may  be  issued  to  person  not  warehouseman, — That 
the  Secretary  of  Agriculture  may,  under  such  rules  and  regulations 
as  he  shall  prescribe,  issue  a  license  to  any  person  not  a  warehouse- 
man to  accept  the  custody  of  agricultural  products  and  to  store  the 
same  in  a  warehouse  or  warehouses  owned,  operated,  or  leased  by  any 
State,  upon  condition  that  such  person  agree  to  comply  with  and  abide 
by  the  terms  of  this  Act  and  the  rules  and  regulations  prescribed  here- 
under. Each  person  so  licensed  shall  issue  receipts  for  the  agricul- 
tural products  placed  in  his  custody,  and  shall  give  bond,  in  accord- 
ance with  the  provisions  of  this  Act  and  the  rules  and  regulations  here- 


Commercial  Banking  and  Cpedits  419 

under  affecting  warehousemen  licensed  under  this  Act,  and  shall  other- 
wise be  subject  to  this  Act  and  such  rules  and  regulations  to  the  same 
extent  as  is  provided  for  warehousemen  licensed  hereunder. 

§10.  Reasonable  fees  to  be  charged  by  Secretary  of  Agriculture. — 
That  the  Secretary  of  Agriculture  shall  charge,  assess,  and  cause  to  be 
collected  a  reasonable  fee  for  every  examination  or  inspection  of  a 
warehouse  under  this  Act  when  such  examination  or  inspection  is 
made  upon  application  of  a  warehouseman,  and  a  fee  not  exceeding 
$2  per  annum  for  each  license  or  renewal  thereof  issued  to  a  ware- 
houseman under  this  Act.  All  such  fees  shall  be  deposited  and  cov- 
ered into  the  Treasury  as  miscellaneous  receipts. 

§11.  When  person  may  be  licensed  for  what  purposes. — That  the 
Secretary  of  Agriculture  may,  upon  presentation  of  satisfactory  proof 
of  competency,  issue  to  any  person  a  license  to  classify  any  agricul- 
tural product  or  products,  stored  or  to  be  stored  in  a  warehouse  li- 
censed under  this  Act,  according  to  grade  or  otherwise  and  to  certifi- 
cate the  grade  or  other  class  thereof,  or  to  weigh  the  same  and  certifi- 
cate the  weight  thereof,  or  both  to  classify  and  weigh  the  same  and  to 
certificate  the  grade  or  other  class  and  the  weight  thereof,  upon  con- 
dition that  such  person  agree  to  comply  with  and  abide  by  the  terms 
of  this  Act  and  of  the  rules  and  regulations  prescribed  hereunder  so 
far  as  the  same  relate  to  him. 

§12.  May  suspend  such  license  if  person  misapplies  authority. — 
That  any  license  issued  to  any  person  to  classify  or  to  weigh  any  agri- 
cultural product  or  products  under  this  Act  may  be  suspended  or  re- 
voked by  the  Secretary  of  Agriculture  whenever  he  is  satisfied,  after 
opportunity  afforded  to  the  licensee  concerned  for  a  hearing,  that  suc]i 
licensee  has  failed  to  classify  or  to  weigh  any  agricultural  product  or 
products  correctly,  or  has  violated  any  of  the  provisions  of  this  Act  or 
of  the  rules  and  regulations  prescribed  hereunder,  so  far  as  the  same 
may  relate  to  him,  or  that  he  has  used  his  license  or  allowed  it  to  be 
used  for  any  improper  purpose  whatsoever.  Pending  investigation, 
the  Secretary  of  Agriculture,  whenever  he  deems  necessary,  may 
suspend  a  license  temporarily  without  hearing. 

§13.  Receipt  of  products  for  storage. — That  every  warehouseman 
conducting  a  warehouse  licensed  under  this  Act  shall  receive  for  stor- 


420  Bank  and  Trade  Acceptances 

age  therein,  so  far  as  its  capacity  permits,  any  agricultural  product 
of  the  kind  customarily  stored  therein  by  him  which  may  be  tendered 
to  him  in  a  suitable  condition  for  warehousing,  in  the  usual  manner 
in  the  ordinary  and  usual  course  of  business,  without  making  any  dis- 
crimination between  persons  desiring  to  avail  themselves  of  ware- 
house facilities. 

§14.  Person  depositing  does  so  under  terms  of  this  Act. — That  any 
person  who  deposits  agricultural  products  for  storage  in  a  warehouse 
licensed  under  this  Act  shall  be  deemed  to  have  deposited  the  same 
subject  to  the  terms  of  this  Act  and  the  rules  and  regulations  pre- 
scribed hereunder. 

§15.  Inspecting  and  grading  of  grains,  flaxseed,  etc. — That  grain, 
flaxseed,  or  any  other  fungible  agricultural  product  stored  for  inter- 
state or  foreign  commerce,  or  in  any  place  under  the  exclusive  juris- 
diction of  the  United  States,  in  a  warehouse  licensed  under  this  Act 
shall  be  inspected  and  graded  by  a  person  duly  licensed  to  grade  the 
same  under  this  Act. 

§16.  Segregation  of  stored  products  to  permit  identification,  etc. — 

That  every  warehouseman  conducting  a  warehouse  licensed  under  this 
Act  shall  keep  the  agricultural  products  therein  of  one  depositor  so 
far  separate  from  agricultural  products  of  other  depositors,  and  from 
other  agricultural  products  of  the  same  depositor  for  which  a  separate 
receipt  has  been  issued,  as  to  permit  at  all  times  the  identification  and 
redelivery  of  the  agricultural  products  deposited ;  but  if  authorized 
by  agreement  or  by  custom,  a  warehouseman  may  mingle  fungible  ag- 
ricultural products  with  other  agricultural  products  of  the  same  kind 
and  grade,  and  shall  be  severally  liable  to  each  depositor  for  the  care 
and  redelivery  of  his  share  of  such  mass,  to  the  same  extent  and  under 
the  same  circumstances  as  if  the  agricultural  products  had  been  kept 
separate,  but  he  shall  at  no  time,  while  they  are  in  his  custody  mix 
fungible  agricultural  products  of  different  grades. 

§17.  Warehouseman  required  to  issue  receipts  for  products  stored. — 
That  for  all  agricultural  products  stored  for  interstate  or  foreign  com- 
merce, or  in  any  place  under  the  exclusive  jurisdiction  of  the  United 
States,  in  a  warehouse  licensed  under  this  Act,  original  receipts  shall 
be  issued  by  the  warehouseman  conducting  the  same,  but  no  receipts 


Commercial  Banking  and  Cpedits  421 

shall  be  issued  except  for  agricultural  products  actually  stored  in  the 
warehouse  at  the  time  of  the  issuance  thereof. 

§18.  What  receipt  should  embody. — That  every  receipt  issued  for 
agricultural  products  stored  in  a  warehouse  licensed  under  this  Act 
shall  embody  within  its  written  or  printed  terms   (a)  the  location  of 
the   warehouse  in  which  the   agricultural   products   are   stored ;     (b) 
the  date  of  issue  of  the  receipt ;    (c)  the  consecutive  number  of  the 
receipt;    (d)  a  statement  whether  the  agricultural  products  received 
will  be  delivered  to  the  bearer,  to  a  specified  person,  or  to  a  specified 
person  or  his  order;    (e)  the  rate  of  storage  charges;    (f)  a  description 
of  the  agricultural  products  received,  showing  the  quantity  thereof,  or, 
in  case  of  agricultural  products  customarily  put  up  in  bales  or  pack- 
ages, a  description  of  such  bales  or  packages  by  marks,  numbers,  or 
other  means  of  identification  and  the  weight  of  such  bales  or  packages ; 
(g)  the  grade  or  other  class  of  the  agricultural  products  received  and 
the  standard  or  description  in  accordance  with  which  such  classification 
has  been  made:  PROVIDED,  That  such  grade  or  other  class  shall  be 
stated  according  to  the  official  standard  of  the  United  States  applicable 
to  such  agricultural  products  as  the  same  may  be  fixed  and  promul- 
gated under  authority  of  law:     PROVIDED  FURTHER,  That  until 
such    official    standards    of    the    United    States    for    any    agricultural 
product  or  products  have  been  fixed  and  promulgated,  the  grade  or 
other  class  thereof  may  be  stated  in  accordance  with  any  recognized 
standard  or  in  accordance  with  such  rules  and  regulations  not  incon- 
sistent herewith  as  may  be  prescribed  by  the  Secretary  of  Agriculture  ; 
(h)  a  statement  that  the  receipt  is  issued  subject  to  the  United  States 
Warehouse  Act  and  the  rules  and  regulations  prescribed  thereunder ; 
(i)  if  the  receipt  be  issued  for  agricultural  products  of  which  the  ware- 
houseman is  owner,  either  solely  or  jointly  or  in  common  with  others, 
the  fact  of  such  ownership  ;    (j)  a  statement  of  the  amount  of  advances 
made  and  of  liabilities  incurred  for  which  the  warehouseman  claims 
a  lien:     PROVIDED,  That  if  the  precise  amount  of  such  advances 
made  or  of  such  liabilities  incurred  be  at  the  time  of  the  issue  of  the 
receipt  unknown  to  the  warehouseman  or  his  agent  who  issues  it.  a 
statement  of  the  fact  that  advances  have  been  made  or  liabilities  in- 
curred and  the  purpose  thereof  shall  be   sufficient;     (k)    such   other 
terms  and  conditions  within  the  limitations  of  this  Act  as  may  be  re- 
quired by  the  Secretary  of  Agriculture;    and  (1)  the  signature  of  the 
warehouseman,  which  may  be  made  by  his  authoricd  agent:     PRO- 


422  Bank  and  Trade  Acceptances 

V^IDED,  That  unless  otherwise  required  by  the  law  of  the  State  in 
which  the  warehouse  is  located,  when  requested  by  the  depositor  of 
other  than  fungible  agricultural  products,  a  receipt  omitting  compli- 
ance with  subdivision  (g)  of  this  section  may  be  issued  if  it  have 
plainly  and  conspicuously  embodied  in  its  written  or  printed  terms  a 
provision  that  such  receipt  is  not  negotiable. 

§19.  Secretary  of  Agriculture  to  promulgate  standards. — That  the 
Secretary  of  Agriculture  is  authorized,  from  time  to  time,  to  establish 
and  promulgate  standards  for  agricultural  products  in  this  Act  defined 
by  which  their  quality  or  value  may  be  judged  or  determined:  PRO- 
VIDED, That  the  standards  for  any  agricultural  products  which  have 
been,  or  which  in  future  may  be,  established  by  or  under  authority  of 
any  other  Act  of  Congress  shall  be,  and  are  hereby,  adopted  for  the 
purposes  of  this  Act  as  the  official  standards  of  the  United  States  for 
the  agricultural  products  to  which  they  relate. 

§20.  While  an  original  receipt  is  outstanding  no  further  receipt  shall 
be  issued. — That  while  an  original  receipt  issued  under  this  Act  is 
outstanding  and  uncanceled  by  the  warehouseman  issuing  the  same 
no  other  or  further  receipt  shall  be  issued  for  the  agricultural  product 
covered  thereby  or  for  any  part  thereof,  except  that  in  the  case  of  a 
lost  or  destroyed  receipt,  a  new  receipt,  upon  the  same  terms  and  sub- 
ject to  the  same  conditions  and  bearing  on  its  face  the  number  and 
date  of  the  receipt  in  lieu  of  which  it  is  issued,  may  be  issued  upon  the 
compliance  with  the  statutes  of  the  United  States  applicable  thereto 
in  places  under  the  exclusive  jurisdiction  of  the  United  States  or  upon 
compliance  with  the  laws  of  any  State  applicable  thereto  in  any 
place  not  under  the  exclusive  jurisdiction  of  the  United  States: 
PROVIDED,  That  if  there  be  in  such  case  no  statute  of  the  United 
States  or  law  of  a  State  applicable  thereto  such  new  receipts  may  be 
issued  upon  the  giving  of  satisfactory  security  in  compliance  with  the 
rules  and  regulations  made  pursuant  to  this  Act. 

§21.  Delivery. — That  a  warehouseman  conducting  a  warehouse  li- 
censed under  this  Act,  in  the  absence  of  some  lawful  excuse,  shall, 
without  unnecessary  delay,  deliver  the  agricultural  products  stored 
therein  upon  a  demand  made  either  by  the  holder  of  a  receipt  for 
such  agricultural  products  or  by  the  depositor  thereof  if  such  demand 
be  accompanied  with  (a)  an  ofTer  to  satisfy  the  warehouseman's  lien ; 


Commercial  Banking  and  Cp£dits  423 

(b)  an  offer  to  surrender  the  receipt,  if  negotiable,  with  such  in- 
dorsements as  would  be  necessary  for  the  negotiation  of  the  receipt ; 
and  (c)  a  readiness  and  willingness  to  sign,  when  the  products  are 
delivered,  an  acknowledgment  that  they  have  been  delivered  if  such 
signature  is  requested  by  the  warehouseman. 

§22.  Warehouseman  shall  cancel  each  receipt  returned. — That  a 
warehouseman  conducting  a  warehouse  licensed  under  this  Act  shall 
plainly  cancel  upon  the  face  thereof  each  receipt  returned  to  him  upon 
the  delivery  by  him  of  the  agricultural  products  for  which  the  receipt 
was  issued. 

§23.  Warehouseman  required  to  keep  records  and  make  reports. — 
That  every  warehouseman  conducting  a  warehouse  licensed  under  this 
Act  shall  keep  in  a  place  of  safety  complete  and  correct  records  of  all 
agricultural  products  stored  therein  and  withdrawn  therefrom,  of  all 
warehouse  receipts  issued  by  him,  and  of  the  receipts  returned  to  and 
canceled  by  him,  shall  make  reports  to  the  Secretary  of  Agriculture 
concerning  such  warehouse  and  the  condition,  contents,  operation,  and 
business  thereof  in  such  form  and  at  such  times  as  he  may  require, 
and  shall  conduct  said  warehouse  in  all  other  respects  in  compliance 
with  this  Act  and  the  rules  and  regulations  made  hereunder. 

§24.  Business  regulated  by  Secretary  of  Agriculture. — That  the  Sec- 
retary of  Agriculture  is  authorized  to  cause  examinations  to  be  made 
of  any  agricultural  product  stored  in  any  warehouse  licensed  under 
this  Act.  Whenever,  after  opportunity  for  hearing  is  given  to  the 
warehouseman  conducting  such  warehouse,  it  is  determined  that  he 
is  not  performing  fully  the  duties  imposed  on  him  by  this  Act  and  the 
rules  and  regulations  made  hereunder,  the  Secretary  may  publish  his 
findings. 

§25.  Revocation  of  license  after  hearing  and  suspension. — That  the 
Secretary  of  Agriculture  may,  after  opportunity  for  hearing  has  been 
afforded  to  the  licensee  concerned,  suspend  or  revoke  any  license 
issued  to  any  warehouseman  conducting  a  warehouse  under  this  Act, 
for  any  violation  of  or  failure  to  comply  with  any  provision  of  this 
Act  or  of  the  rules  and  regulations  made  hereunder  or  upon  the  ground 
that  unreasonable  or  exorbitant  charges  have  been  made  for  services 
rendered.  Pending  investigation,  the  Secretary  of  Agriculture,  when- 
ever he  deems  necessary,  may  suspend  a  license  temporarily  without 
hearing. 


424  Bank  and  Trade  Acceptances 

§26.  Publication  of  results  of  investigation. — That  the  Secretary  of 

Agriculture  from  time  to  time  may  publish  the  results  of  any  inves- 
tigations made  under  section  three  of  this  Act;  and  he  shall  publish 
the  names  and  locations  of  warehouses  licensed  and  bonded  and  the 
names  and  addresses  of  persons  licensed  under  this  Act  and  lists  of 
all  licenses  terminated  under  this  Act  and  the  causes  therefor. 

§27.  Examination  of  books,  records,  etc. — That  the  Secretary  of 
Agriculture  is  authorized  through  officials,  employees  or  agents  of  the 
Department  of  Agriculture  designated  by  him  to  examine  all  books, 
records,  papers,  and  accounts  of  warehouses  licensed  under  this  Act 
and  of  the  warehousemen  conducting  such  warehouses  relating 
thereto. 

§28.  Make  rules  and  regulations  necessary. — That  the  Secretary  of 
Agriculture  shall  from  time  to  time  make  such  rules  and  regulations 
as  he  may  deem  necessary  for  the  efficient  execution  of  the  provisions 
of  this  Act. 

§29.  This  act  not  to  be  construed  to  conflict  with,  impair  or  limit 
State  laws. — That  nothing  in  this  Act  shall  be  construed  to  conflict 
with,  or  to  authorize  any  conflict  with,  or  in  any  way  to  impair  or 
limit  the  effect  or  operation  of  the  laws  of  any  State  relating  to  ware- 
houses, warehousemen,  weighers,  graders,  or  classifiers ;  but  the  Sec- 
retary of  Agriculture  is  authorized  to  cooperate  with  such  officials  as 
are  charged  with  the  enforcement  of  such  State  laws  in  such  States 
and  through  such  cooperation  to  secure  the  enforcement  of  the  provi- 
sions of  this  Act ;  nor  shall  this  Act  be  construed  so  as  to  limit  the 
operation  of  any  statute  of  the  United  States  relating  to  warehouses 
or  warehousemen,  weighers,  graders,  or  classifiers  now  in  force  in  the 
District  of  Columbia  or  in  any  Territory  or  other  place  under  the  ex- 
clusive jurisdiction  of  the  United  States. 

§30.  Punishment  provided  for  misdemeanors. — That  every  person 
who  shall  forge,  alter,  counterfeit,  simulate,  or  falsely  represent,  or 
shall  without  proper  authority  use,  any  license  issued  by  the  Secre- 
tary of  Agriculture  under  this  Act,  or  who  shall  violate  or  fail  to 
comply  with  any  provision  of  section  eight  of  this  Act,  or  who  shall 
issue  or  utter  a  false  or  fraudulent  receipt  or  certificate,  shall  be 
deemed  guilty  of  a  misdemeanor,  and  upon  conviction  thereof  shall  be 


Commercial  Banking  and  Cp£dits  425 

fined  not  more  than  $500  or  imprisoned  not  more  than  six  months,  or 
both,  in  the  discretion  of  the  court. 

§31.  Appropriation. — That  there  is  hereby  appropriated,  out  of  any 
money  in  the  Treasury  not  otherwise  appropriated,  the  sum  of  $50,- 
000,  available  until  expended,  for  the  expenses  of  carrying  into  effect 
the  provisions  of  this  Act,  including  the  payment  of  such  rent  and  the 
employment  of  such  persons  and  means  as  the  Secretary  of  Agricul- 
ture may  deem  necessary  in  the  City  of  Washington  and  elsewhere, 
and  he  is  authorized,  in  his  discretion,  to  employ  qualified  persons  not 
regularly  in  the  service  of  the  United  States  for  temporary  assistance 
in  carrying  out  the  purposes  of  this  Act,  and  out  of  the  moneys  appro- 
priated by  this  Act  to  pay  the  salaries  and  expenses  thereof. 

§32.  Effect  of  invalidity  of  part  of  Act. — That  if  any  clause,  sen- 
tence, paragraph,  or  part  of  this  Act  shall,  for  any  reason,  be  adjudged 
by  any  court  of  competent  jurisdiction  to  be  invalid,  such  judgment 
shall  not  affect,  impair,  or  invalidate  the  remainder  thereof,  but  shall 
be  confined  in  its  operation  to  the  clause,  sentence,  paragraph,  or  part 
thereof  directly  involved  in  the  controversy  in  which  such  judgment 
shall  have  been  rendered. 

§33.  That  the  right  to  amend,  alter,  or  repeal  this  Act  is  hereby  ex- 
pressly reserved. 

STAMP  TAXES 

TAXATION  OF  CHECKS,  ACCEPTANCES,  DRAFTS  AND 

PROMISSORY  NOTES 

Taxation    of    Negotiable    Instruments;    Checks,    Drafts,    Promissory 

Notes,  and  Acceptances 

Trade  and  Bank  Acceptances,  being  in  the  same  class  as  other  nego- 
tiable instruments,  are  subject  to  the  same  laws  pertaining  to  stamp 
taxes  as  are  checks,  drafts  and  promissory  notes. 

Classes  of  Negotiable  Instruments  Taxable 

By  the  Federal  Revenue  Act  of  1918,  in  effect  April  1,  1919,  there  is 
imposed  a  tax  on  such  negotiable  instruments  as  above  mentioned, 


4^6  Bank  and  Trade  Acceptances 

payable  otherwise  than  at  sight  or  on  demand,  upon  their  acceptance 
or  delivery  within  the  United  States,  whichever  is  prior,  and  on  prom- 
issory notes,  except  those  given  below  as  exempt,  and  on  each  renewal 
of  the  same, — 2  cents  on  each  $100.  or  fractional  part  thereof.  Amounts 
not  exceeding  $100.  are  taxable  to  the  extent  of  2  cents.  The  "United 
States"  as  given  in  this  law,  includes  the  District  of  Columbia,  Hawaii 
and  Alaska. 

Text  of  Law 

The  text  of  the  law  as  relates  to  such  taxation  follows : — 
Drafts  or  checks  (payable  otherwise  than  at  sight  or  on  demand), 
upon  their  acceptance  or  delivery  within  the  United  States,  which- 
ever is  prior,  promissory  notes,  except  bank  notes  issued  for  circula- 
tion, and  for  each  renewal  of  the  same,  for  an  amount  not  exceeding 
$100.  are  taxed  2  cents,  and  for  each  additional  $100.  or  fractional  part 
thereof,  2  cents. 

Analysis  of  Negotiable  Instruments  taxable 

Included  amongst  the  taxable  instruments  payable  otherwise  than 
at  sight  or  on  demand  are  the  following: 

1.  Trade  Acceptances. 

2.  Bankers'  Acceptances. 

3.  Time  drafts  which  are  drawn  on  a  domestic  bank  to  secure 

money  to  be  used  in  purchasing  goods  for  exportation. 

4.  Time  drafts  which  are  drawn  against  the  proceeds  of  time 

drafts  directly  covering  exports  to  a  foreign  country,  and 
which  constitute  an  inherent,  necessary  and  bona  fide  part 
of  the  actual  process  of  exportation. 

5.  Drafts  which  state  no  time  for  payment,  but  which  are  ac- 

cepted payable  on  a  certain  future  date. 

6.  Time  drafts  which  cover  articles  shipped  from  the  United 

States,  Alaska  and  Hawaii  to  the  Canal  Zone,  if  such  drafts 
are  delivered  within  the  United  States,  Alaska  or  Hawaii. 

7.  Time  drafts  which  do  not  cover  exports,  drawn  and  delivered 

or  accepted  in  the  United  States  and  payable  in  foreign 
countries. 

8.  Post-dated  checks  which   are  expressly  payable   after  their 

date. 

9.  Time  drafts  which   are  drawn  against  shipments  from  the 

Philippines,  Virgin  Islands,  and  Porto  Rico  into  the 
United  States,  if  delivery  or  acceptance  of  such  drafts  first 
takes  place  within  the  United  States,  Hawaii  or  Alaska. 


Commercial  Banking  and  Credits  427 

When  and  where  Negotiable  Instruments  Exempt  from  Taxation 

The  following  checks  and  drafts  are  exempt  from  taxation  under 
this  law : 

1.  All  checks  and  drafts  drawn  on  demand. 

2.  Post-dated  checks  which  are  not  expressly  payable  after  their 

date. 

3.  Drafts  which  are  drawn  abroad  on  a  foreign  drawee  with  a 

foreign  payee  and  pass  through  a  bank  in  the  United  States 
in  the  course  of  collection,  unless  delivered  by  an  agent  of 
the  drawer  to  an  agent  of  the  payee  within  the  United 
States. 

4.  Time  drafts  which  are  drawn  on  domestic  banks  against  ex- 

port shipments  delivered  to  the  first  carrier  for  transporta- 
tion, covering  the  period  of  transit  from  the  interior  point 
to  the  seaboard. 

5.  Time  drafts  which  cover  shipments  to  the  Philippines,  the 

Virgin  Islands  and  Porto  Rico. 

6.  Time  drafts  which  directly  cover  exports  to  a  foreign  coun- 

try, and  constitute  an  inherent,  necessary  and  bona  fide 
part  of  the  actual  process  of  exportation. 

Promissory  Notes  Included ;    When  and  Where  Taxable 

Promissory  notes  as  outlined  in  the  following,  and  renewals  of  same, 
are  also  negotiable  instruments  upon  which  a  tax  is  imposed : 

1.  Notes  which  are  given  for  security  only. 

2.  Notes  which  are  payable  on  demand  or  after  date. 

3.  Promissory  notes  which  are  secured  by  bonds  of  the  War 

Finance  Corporation. 

4.  Promissory  notes  which  accompany  mortgages  of  joint-stock 

land  banks. 

5.  Instruments  which  are  in  the  form  of  promissory  notes,  rep- 

resenting the  interest  upon  promissory  notes,  not  inckided 
in  (5)  below,  and  either  separate  from  or  prepared  in  a  form 
and  for  the  purpose  of  being  separated  from  the  principal 
note. 

6.  Promissory    notes    which    are    executed    and    mailed    in    the 

United  States  to  a  payee  in  Canada. 

7.  Extensions    or    renewals    of    promissory    notes    whicli    are 

brought  about  by  extensions  of  mortgages  by  which  such 
notes  are  secured. 

8.  Policy  loan  and  premium  extension  agreements  which  con- 

tain an  unqualified  promise  to  pay  a  specified  sum  of  money 


4^8  Bank  and  Trade  Acceptances 

at  a  certain  date,  excepting  where  the  only  remedy  of  the 
payee  is  to  reduce  or  cancel  the  rights  of  the  insured  in  case 
of  non-payment  of  the  premiums  or  loans. 

Promissory  Notes ;  when  and  where  exempt  from  Taxation 

The  following  promissory  notes  are  exempt  from  taxation : 

1.  Certificates  of  deposit. 

3.  Bank  notes  which  are  issued  for  circulation. 

3.  Promissory  notes  which  are  issued  directly  by  foreign  gov- 

ernments and  which  are  placed  in  this  country  for  sale. 

4.  Promissory  notes  which  are  executed  and  mailed  in  Canada 

to  a  payee  within  the  United  States. 

5.  Coupons  attached  to  a  principal  obligation  which  are  sub- 

stantially repetitions  of  the  promise  to  pay  interest  con- 
tained in  the  principal  obligation. 

6.  Promissory  notes  which  are  secured  by  certificates  of  indebt- 

edness issued  by  the  Director  General  of  Railroads. 

7.  Promissory  notes  which  are  secured  by  United  States  bonds 

or  obligations  issued  after  April  24,  1917,  or  secured  by  the 
pledge  of  a  promissory  note  which  itself  is  secured  by  the 
pledge  of  such  bonds  or  obligations.  Such  bonds  must 
have  a  par  value  of  not  less  than  the  amount  of  such  notes 
to  exempt  the  latter. 

Government  and   Municipal   Obligations   Exempted 

Instruments  exempt. — There  shall  not  be  taxed  under  this  title  any 
bond,  note  or  other  instrument,  issued  by  the  United  States,  or  by  any 
foreign  Government,  or  by  any  State,  Territory,  or  the  District  of 
Columbia,  or  local  subdivision  thereof,  or  municipal  or  other  corpora- 
tion exercising  the  taxing  power. 

Penalty  for  failure  to  comply. — Whoever  makes,  signs,  issues  or  ac- 
cepts, or  causes  to  be  made,  signed,  issued  or  accepted,  any  instru- 
ment, document,  or  paper  of  any  kind  or  description  whatsoever  with- 
out the  full  amount  of  tax  thereon  being  duly  paid ; 

Makes  use  of  any  adhesive  stamp  to  denote  any  tax  imposed  by  this 
title  without  canceling  or  obliterating  such  stamp  as  prescribed  be- 
low; 

Is  guilty  of  a  misdemeanor  and  upon  conviction  thereof  shall  pay 
a  fine  of  not  more  than  $100.  for  each  offense. 


Commercial  Banking  and  Cpedits  429 

Whoever  fraudulently  cuts,  tears,  or  removes  from  any  vellum, 
parchment,  paper,  instrument,  writing,  package,  or  article,  upon  which 
any  tax  is  imposed  by  this  title,  any  adhesive  stamp  or  the  impression 
of  any  stamp,  die,  plate  or  other  article  provided,  made,  or  used  in 
pursuance  of  this  title; 

Fraudulently  uses,  joins,  fixes,  or  places  to,  with,  or  upon  any  vellum, 
parchment,  paper,  instrument,  writing,  package,  or  article,  upon  which 
any  tax  is  imposed  by  this  title,  (1)  any  adhesive  stamp,  or  the  im- 
pression of  any  stamp,  die,  plate,  or  other  article,  which  has  been 
cut,  torn  or  removed  from  any  other  vellum,  parchment,  paper,  in- 
strument, writing,  package,  or  article,  upon  which  any  tax  is  imposed 
by  this  title ;  or  (2)  any  adhesive  stamp  or  the  impression  of  any 
stamp,  die,  plate,  or  other  article  of  insufficient  value ;  or  (3)  any 
forged  or  counterfeit  stamp,  or  the  impression  of  any  forged  or  coun- 
terfeit stamp,  die,  plate  or  other  article ; 

Wilfully  removes,  or  alters  the  cancellation,  or  defacing  marks  of, 
or  otherwise  prepares,  any  adhesive  stamp,  with  intent  to  use,  or  cause 
the  same  to  be  used,  after  it  has  been  already  used,  or  knowingly  or 
wilfully  buys,  sells,  offers  for  sale,  or  gives  away,  any  such  washed 
or  restored  stamp  to  any  person  for  use,  or  knowingly  uses  the  same ; 

Knowingly  and  without  lawful  excuse  (the  burden  of  proof  of  such 
excuse  being  on  the  accused)  has  in  possession  any  washed,  restored, 
or  altered  stamp,  which  has  been  removed  from  any  vellum,  parch- 
ment, paper,  instrument,  writing,  package,  or  article ; 

Is  guilty  of  a  misdemeanor,  and  upon  conviction  shall  be  punished 
by  a  fine  of  not  more  than  $1,000.  or  by  imprisonment  for  not  more 
than  five  years,  or  both,  and  any  such  reused,  canceled,  or  counter- 
feit stamp  and  the  vellum,  parchment,  document,  paper,  package,  or 
article  upon  which  it  is  placed  or  impressed  shall  be  forfeited  to  the 
United  States. 

Cancellation. — That  whenever  an  adhesive  stamp  is  used  for  denot- 
ing any  tax  imposed  by  this  title,  except  as  hereinafter  provided,  the 
person  using  or  affixing  the  same  shall  write  or  stamp  or  cause  to  be 
written  or  stamped  thereupon  the  initials  of  his  or  her  name  and  the 
date  upon  which  the  same  is  attached  or  used,  so  that  the  same  may 
not  again  be  used:  PROVIDED,  That  the  Commissioner  may  pre- 
scribe such  other  method  for  the  cancellation  of  such  stamps  as  he 
may  deem  expedient. 

Cancellation  may  be  effected  also  with  a  machine  or  punch,  but  must 


430  Bank  and  Trade  Acceptances 

not  so  deface  the  stamp  as  to  prevent  its  denomination  and  genui- 
ness  from  being  readily  determined. 

Use  of  cancelled  stamps — refunds. — A  stamp  once  having  been  af- 
fixed to  an  instrument  and  cancelled  cannot  lawfully  be  removed  and 
attached  to  another  instrument.  Refund  will  be  made  by  the  collec- 
tor of  internal  revenue  for  amounts  paid  for  stamps  used  in  excess  of 
requirements,  or  on  instruments  not  actually  eflfective  and  for  which  a 
substitute  is  prepared  and  stamped,  or  on  instruments  not  subject  to 
tax. 

X,iability  to  tax. — The  liability  to  tax  and  the  amount  thereof,  is  de- 
""termiued  by  the  form  and  face  of  a  check  or  draft  and  cannot  be  af- 
fected by  proof  of  facts  or  circumstances  outside  of  the  instrument. 
Payment  for  the  stamp  is  a  matter  for  adjustment  between  the  par- 
ties, but  the  obligation  rests  upon  the  drawee,  payee,  or  indorsee  of  a 
draft  to  see  that  the  tax  is  paid  before  or  at  the  time  of  acceptance  or 
delivery,  and  both  parties  to  a  promissory  note  are  responsible  for 
affixing  and  cancelling  stamps  in  the  required  amount. 


FOREIGN  FINANCING 

UNDER 

THE  EDGE  ACT 
LAWS  AND  SYNOPSIS 


FOREIGN  FINANCING  UNDER  THE  EDGE  ACT 

Since  the  termination  of  the  great  war,  our  international  commerce, 
which  had  been  built  up  at  a  tremendous  cost,  has  been  threatened 
by  new  conditions  seriously  affecting  its  progress. 

The  danger  confronting  the  United  States  in  its  foreign  trade  may 
be  attributed  to  the  following  reasons :  During  the  past  year,  a 
very  serious  situation  has  arisen  in  connection  with  the  exchange 
rates  on  foreign  countries.  The  pound  sterling,  the  mark,  the  franc, 
the  lire,  and  other  European  currencies  have  declined  in  value  con- 
siderably, correspondingly  raising  the  value  of  the  American  dollar 
in  foreign  countries.  This  has  made  it  almost  impossible  for  Euro- 
peans to  buy  American  goods. 

A  more  serious  problem  has  presented  itself  in  connection  with  the 
credit  requirements  of  European  nations, — long  terms  credits, — which 
the  American  exporter  and  banker  have  found  it  very  difficult  to 
extend. 

Prior  to  the  adoption  of  the  Federal  Reserve  System  in  the  United 
States,  the  greater  part  of  our  foreign  trade  was  carried  on  by  the 
larger  English  banking  houses  and  by  some  strong  and  internationally 
established  private  banking  establishments  in  New  York  and  in 
England,  which  had  foreign  branches  throughout  the  world.  The 
smaller  institutions  of  the  country  could  extend  assistance  to  the 
American  foreign  trade  merchant  only  to  a  very  limited  extent. 

As  far  back  as  1913,  steps  were  taken  to  procure  for  the  merchant  of 
this  country  a  larger  participation  in  foreign  trade  and  commerce. 
The  Federal  Reserve  Act  provided,  among  other  things,  that  any  na- 
tional banking  association  having  a  capital  and  surplus  of  at  least 
one  million  dollars,  migiit,  upon  securing  the  approval  of  the  Federal 
Reserve  Board,  establish  branches  in  foreign  countries  and  dependen- 
cies of  the  United  States. 

In  1916,  an  Amendment  was  passed  to  the  Federal  Reserve  Act  per- 
mitting national  banks  having  a  capital  and  surplus  of  at  least  one 
million  dollars  to  cooperate  in  the  establishment  or  ownership  of 
American  banks  or  corporations  principally  engaged  in  foreign  bank- 
ing, by  investing  to  an  amount  not  to  exceed  ten  percentum  of  their 

433 


434  Bank  and  Trade  Acceptances 

capital  and  surplus  in  such  institutions  "chartered  or  incorporated  un- 
der the  laws  of  the  United  States  or  of  any  State  thereof." 

Under  the  Amendment  to  the  Federal  Reserve  Act,  so  passed,  cer- 
tain banking  institutions  were  instrumental  in  organizing  banking 
corporations  of  the  kind  contemplated  by  the  Amendment,  mainly  for 
the  purpose  of  financing  American  exporters  and  importers. 

However,  they  could  extend  their  help  only  to  a  limited  degree  and  fre- 
quent appeals  were  made  for  Federal  incorporation,  which,  it  was  be- 
lieved, would  greatly  lower  the  risk  in  putting  out  capital  in  foreign 
branches.  As  a  consequence,  new  legislation  was  called  for.  The 
national  banks  of  the  country,  moreover,  felt  the  need  of  Federal  legis- 
lation which  would  entitle  them  to  the  benefits  and  protection  of  a 
Federal  charter,  enabling  them  to  compete  for  business  in  foreign 
countries  upon  a  larger  ^and  more  profitable  scale. 

On  September  17,  1919,  the  McLean  Bill  became  a  law,  under  the 
provisions  of  which,  national  banks,  without  regard  to  the  amount  of 
their  capital  and  surplus,  are  permitted  to  subscribe  in  amounts  not 
in  excess  of  five  percentum  of  their  capital  and  surplus,  to  the  capital 
of  corporations  of  the  kind  contemplated  by  the  Edge  Act,  thus  en- 
abling national  banks  to  further  contribute  to  the  financing  of  our 
foreign  trade. 

The  Edge  Act  had  its  introduction  into  the  United  States  Senate 
on  July  15th,  1919,  and  became  a  law  on  December  24th,  of  that  year. 
By  the  passage  of  the  Edge  Act,  supplementing  the  Amendments  to 
the  Federal  Reserve  Act  and  the  McLean  Act,  providing  for  participa- 
tion by  national  banks  in  the  organization  of  corporations  principally 
engaged  in  foreign  banking  and  financing,  it  is  hoped  that  much  of  our 
great  foreign  trade  can  be  retained  to  the  benefit  of  American 
manufacturers  and  producers. 

The  Act  provides  for  the  Federal  incorporation  and  regulation  of 
banking  institutions  for  the  purpose  of  engaging  in  foreign  banking  or 
other  foreign  financial  operations  or  for  engaging  in  such  operations 
in  a  dependency  or  insular  possession  of  the  United  States,  either 
directly  or  through  the  agency,  ownership  or  control  of  local  institu- 
tions in  such  places. 

Briefly  described,  the  Act  distinguishes  between  two  classes  of  cor- 
porations— one  class  doing  principally  a  banking  business,  the  other 
an  investment  business,  taking  long  time  paper,  including  bonds  and 
mortgages  and  issuing  their  own  debentures  against  them. 

As  to  the  first  class,  those  corporations  carrying  on  a  banking  busi- 


Commercial  Banking  and  Credits  435 

ness  may  conduct  every  nature  of  financial  operation  with  the  excep- 
tion of  receiving  deposits  in  the  United  States,  except  such  as  may 
be  incidental  to  or  for  the  purpose  of  carrying  out  transactions  abroad. 

Both  classes  of  corporations  are  prohibited  from  carrying  on  any 
part  of  their  business  activities  in  the  United  States,  except  such  as, 
in  the  opinion  of  the  Federal  Reserve  Board,  may  be  incidental  to  their 
foreign  or  international  business. 

They  may  not  become  members  of  the  Federal  Reserve  System  and 
are  not  authorized  to  invest  in  any  corporation  other  than  a  banking 
corporation  an  amount  in  excess  of  ten  percentum  of  their  own  capital 
and  surplus  without  the  approval  of  the  Federal  Reserve  Board. 

The  procedure  contemplated  under  the  Edge  Act  for  foreign  financ- 
ing, is  one  by  w^hich  a  party  sells  merchandise  to  a  second  party  who  is 
penniless  and  yet  obtains  actual  money  in  the  transaction.  The  Amer- 
ican exporter  or  manufacturer  may  sell  his  goods  to  an  impoverished 
foreign  purchaser — a  foreign  government  or  a  private  concern. 

Corporations  organized  under  the  Edge  Act  may  accept  collateral 
from  the  purchaser  such  as  is  acceptable  to  the  Federal  Reserve 
Board,  and  against  this  may  issue  debentures  to  be  sold  to  investors, 
the  proceeds  of  which  sale  will  be  paid  to  the  American  seller. 

The  Act  is  very  extensive  in  its  operations,  and  powers  are  granted 
to  these  corporations  permitting  them  to  accept  even  mortgages  on 
the  plants  or  other  real  property  of  the  purchasers. 

A  foreign  concern  in  need  of  raw  material  may  obtain  it  by  giving 
a  mortgage  on  its  plant,  and  eventually,  by  turning  this  raw  mate- 
rial into  finished  products,  will  be  enabled  to  redeem  its  collateral 
and  to  put  aside  a  little  profit  besides. 

While  it  is  true  that  some  of  the  leading  banking  institutions  of  the 
country  have  rendered  a  noticeable  service  to  the  commerce  of  the 
nation  in  the  form  of  short  term  credits,  their  liabilities  are,  however, 
limited.  Long  term  credits,  that  is,  for  periods  beyond  ninety  days, 
are  made  possible  by  the  Edge  Act.  For  example,  a  corporation  lo- 
cated in  Belgium  is  desirous  of  purchasing  American  machinery  for 
the  rebuilding  of  its  factories.  The  transaction  called  for  is  on  the 
basis  of  "credit  extension"  to  the  Belgium  firm,  which  may  have  given, 
as  security  for  the  purchase  pri^c,  corporate  bonds  maturing  eight 
or  ten  years  hence.  Even  though  this  security  is  acceptable  as  re- 
gards safety  to  the  American  manufacturer,  he  is  still  unable  to  extend 
such  long  term  credit  and  is  unable  to  carry  the  bonds  until  maturity, 
because  this  would  result  in  a  tie-up  of  his  capital.     The  seller,  there- 


43^  Bank  and  Trade  Acceptances 

fore,  would  be  compelled  to  lose  the  sale  unless  the  bonds  can  be 
quickly  converted  into  cash. 

The  Edge  Act  for  foreign  financing  would  come  in  as  of  direct  as- 
sistance. The  American  manufacturer  could  then  arrange  with  a  cor- 
poration organized  under  the  Act  to  take  such  foreign  securities,  ad- 
vance the  cash,  and  within  such  limitations  as  the  law  and  the  Fed- 
eral Reserve  Board  prescribe,  issue  its  own  notes,  which  could  then  be 
offered  to  the  public  for  investment.  The  result  of  this  roundabout 
financing  is  that  the  purchaser  at  once  receives  the  purchase  price  and 
the  European  buyer  the  goods.  The  credit  is  passed  to  the  American 
investor. 

The  Edge  Act,  therefore,  provides  for  the  organization  of  corpora- 
tions given  the  right  to  engage  in  international  and  foreign  banking, 
and  in  which  national  banks  may  participate  to  a  limited  extent,  there- 
by affording  a  means  of  making  available  quick  and  large  capital  for 
the  purpose  of  extending  credit  to  Europe. 

It  provides  for  a  well  regulated  system  of  financing  our  foreign 
trade,  whereby  such  collateral  as  foreign  purchasers  possess  may  be 
taken  in  payment  of  American  goods.  While  it  is  true  that  State 
institutions  have  been  important  factors  in  the  financing  of  American 
foreign  trade  until  the  present,  still  the  corporations  which  may  be  or- 
ganized under  the  Edge  Act  will  come  as  an  additional  inducement  of- 
fering the  assistance  of  the  American  investor  and  banker  on  a  much 
wider  scale  than  heretofore  possible. 

Following  is  given  the  text  and  of  the  Edge  Act  in  relation  to  foreign 
financing,  which  became  a  law  on  December  24,  1919, 


THE  EDGE  ACT 

For  Foreign  Financing 
Approved  December  24,  1919 
AN  ACT 

To  amend  the  Act  approved  December  2^,  1^13,  known  as  the  Federal 

Reserve  Act 

BE  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  assembled,  That  the  Act  ap- 
proved December  23,  1913,  known  as  the  Federal  Reserve  Act,  as 
amended,  be  further  amended  by  adding  a  new  section  as  follows : 

"BANKING  CORPORATIONS  AUTHORIZED  TO  DO 
FOREIGN  BANKING  BUSINESS 

Organization   of   Corporations 

"Sec.  25  (a).  Corporations  to  be  organized  for  the  purpose  of  en- 
gaging in  international  or  foreign  banking  or  other  international  or 
foreign  financial  operations,  or  in  banking  or  other  financial  operations 
in  a  dependency  or  insular  possession  of  the  United  States,  either 
directly  or  through  the  agency,  ownership,  or  control  of  local  insti- 
tutions in  foreign  countries,  or  in  such  dependencies  or  insular  pos- 
sessions as  provided  by  this  section,  and  to  act  when  required  by  the 
Secretary  of  the  Treasury  as  fiscal  agents  of  the  United  States,  may 
be  formed  by  any  number  of  natural  persons,  not  less  in  any  case  than 
five. 

Articles  of  association. — "Such  persons  shall  enter  into  articles  of 
association  which  shall  specify  in  general  terms  the  objects  for  which  the 
association  is  formed  and  may  contain  any  other  provisions  not  incon- 
sistent with  law  which  the  association  may  see  fit  to  adopt  for  the 
regulation  of  its  business  and  the  conduct  of  its  affairs. 

437 


438  Bank  and  Trade  Acceptances 

Required  to  be  forwarded  to  Federal  Reserve  Board. — "Such  articles 
of  association  shall  be  signed  by  all  of  the  persons  intending  to  par- 
ticipate in  the  organization  of  the  corporation  and,  thereafter,  shall  be 
forwarded  to  the  Federal  Reserve  Board  and  shall  be  filed  and  pre- 
served in  its  office.  The  persons  signing  the  said  articles  of  associa- 
tion shall,  under  their  hands,  make  an  organization  certificate  which 
shall  specifically  state : 

What  is  required  to  be  stated. — "First.  The  name  assumed  by  such 
corporation,  which  shall  be  subject  to  the  approval  of  the  Federal 
Reserve  Board. 

"Second.  The  place  or  places  where  its  operations  are  to  be  car- 
ried on. 

"Third.  The  place  in  the  United  States  where  its  home  office  is  to 
be  located. 

"Fourth.  The  amount  of  its  capital  stock  and  the  number  of  shares 
into  which  the  same  shall  be  divided. 

"Fifth.  The  names  and  places  of  business  or  residence  of  the  persons 
executing  the  certificate  and  the  number  of  shares  to  which  each  has 
subscribed. 

"Sixth.  The  fact  that  the  certificate  is  made  to  enable  the  persons 
subscribing  the  same,  and  all  other  persons,  firms,  companies,  and 
corporations,  who  or  which  may  thereafter  subscribe  to  or  purchase 
shares  of  the  capital  stock  of  such  corporation,  to  avail  themselves 
of  the  advantages  of  this  section. 

Corporate  Functions 

Organization  formalities;  directors  must  be  citizens. — "The  per- 
sons signing  the  organization  certificate  shall  duly  acknowledge  the 
execution  thereof  before  a  judge  of  some  court  of  record  or  notary 
public,  who  shall  certify  thereto  under  the  seal  of  such  court  or  notary, 
and  thereafter  the  certificate  shall  be  forwarded  to  the  Federal  Re- 
serve Board  to  be  filed  and  preserved  in. its  office.  Upon  duly  making 
and  filing  articles  of  association  and  an  organization  certificate,  and 
after  the  Federal  Reserve  Board  has  approved  the  same  and  issued 
a  permit  to  begin  business,  the  association  shall  become  and  be  a  body 
corporate,  and  as  such  and  in  the  name  designated  therein  shall  have 
power  to  adopt  and  use  a  corporate  seal,  which  may  be  changed  at 
the  pleasure  of  its  board  of  directors ;   to  have  succession  for  a  period 


Commercial  Banking  and  Cpzdits  439 

of  twenty  years  unless  sooner  dissolved  by  the  act  of  the  shareholders 
owning  two-thirds  of  the  stock  or  by  an  Act  of  Congress  or  unless  its 
franchises  become  forfeited  by  some  violation  of  law;  to  make  con- 
tracts ;  to  sue  and  be  sued,  complain,  and  defend  in  any  court  of 
law  or  equity;  to  elect  or  appoint  directors,  all  of  whom  shall  be 
citizens  of  the  United  States ;  and,  by  its  board  of  directors,  to 
appoint  such  officers  and  employees  as  may  be  deemed  proper,  de- 
fine their  authority  and  duties,  require  bonds  of  them,  and  fix  the 
penalty  thereof,  dismiss  such  officers  or  employees,  or  any  thereof,  at 
pleasure  and  appoint  others  to  fill  their  places ;  to  prescribe,  by  its 
board  of  directors,  by-laws  not  inconsistent  with  law  or  with  the  regula- 
tions of  the  Federal  Reserve  Board  regulating  the  manner  in  which 
its  stock  shall  be  transferred,  its  directors  elected  or  appointed,  its 
officers  and  employees  appointed,  its  property  transferred,  and  the 
privileges  granted  to  it  by  law  exercised  and  enjoyed. 

General  Powers 

Foreign  exchange  operations ;  debentures  to  ten  times  capital  stock 
and  surplus;  limitations  on  deposits;  reserve  board  oversight;  re- 
serve against  deposits. — "Each  corporation  so  organized  shall  have 
power,  under  such  rules  and  regulations  as  the  Federal  Reserve  Board 
may  prescribe : 

"(a)  To  purchase,  sell,  discount,  and  negotiate,  with  or  without  its 
indorsement  or  guaranty,  notes,  drafts,  checks,  bills  of  exchange, 
acceptances,  including  bankers'  acceptances,  cable  transfers,  and  other 
evidences  of  indebtedness ;  to  purchase  and  sell,  with  or  without  its 
indorsement  or  guaranty,  securities,  including  the  obligations  of  the 
United  States  or  of  any  State  thereof  but  not  including  shares  of 
stock  in  any  corporation  except  as  herein  provided ;  to  accept  bills  or 
drafts  drawn  upon  it  subject  to  such  limitations  and  restrictions  as 
the  Federal  Reserve  Board  may  impose;  to  issue  letters  of  credit;  to 
purchase  and  sell  coin,  bullion,  and  exchange ;  to  borrow  and  to  lend 
money;  to  issue  debentures,  bonds,  and  promissory  notes  under  sucli 
general  conditions  as  to  security  and  such  limitations  as  the  Federal 
Reserve  Board  may  prescribe,  but  in  no  event  having  liabil- 
ities outstanding  thereon  at  any  one  time  exceeding  ten  times  its 
capital  stock  and  surplus;  to  receive  deposits  outside  of  the  United 
States  and  to  receive  only  such  deposits  within  the  United  States  as 
may  be  incidental  to  or  for  the  purpose  of  carrying  out  transactions  in 


440  Bank  and  Trade  Acceptances 

foreign  countries  or  dependencies  or  insular  possessions  of  the  United 
States ;  and  generally  to  exercise  such  powers  as  are  incidental  to  the 
powers  conferred  by  this  Act  or  as  may  be  usual,  in  the  determination 
of  the  Federal  Reserve  Board,  in  connection  with  the  transaction  of 
the  business  of  banking  or  other  financial  operations  in  the  countries, 
colonies,  dependencies,  or  possessions  in  which  it  shall  transact  busi- 
ness and  not  inconsistent  with  the  powers  specifically  granted  herein. 
Nothing  contained  in  this  section  shall  be  construed  to  prohibit  the 
Federal  Reserve  Board,  under  its  power  to  prescribe  rules  and  regu- 
lations, from  limiting  the  aggregate  amount  of  liabilities  of  any  or  all 
classes  incurred  by  the  corporation  and  outstanding  at  any  one  time. 
Whenever  a  corporation  organized  under  this  section  receives  depos- 
its in  the  United  States  authorized  by  this  section  it  shall  carry  re- 
serves in  such  amounts  as  the  Federal  Reserve  Board  may  prescribe, 
but  in  no  event  less  than  10  per  centum  of  its  deposits. 

Establishment  of  agencies  and  branches. — "(h)  To  establish  and 
maintain  for  the  transaction  of  its  business  branches  or  agencies  in 
foreign  countries,  their  dependencies  or  colonies,  and  in  the  dependen- 
cies or  insular  possessions  of  the  United  States,  at  such  places  as  may 
be  approved  by  the  Federal  Reserve  Board  and  under  such  rules  and 
regulations  as  it  may  prescribe,  including  countries  or  dependencies 
not  specified  in  the  original  organization  certificate. 

Power  to  Purchase  and  Hold  Stock 

Stock  of  other  corporations ;  limit  to  holding. — "  (c)  With  the  con- 
sent of  the  Federal  Reserve  Board  to  purchase  and  hold  stock  or  other 
certificates  of  ownership  in  any  other  corporation  organized  under  the 
provisions  of  this  section,  or  under  the  laws  of  any  foreign  country  or 
a  colony  or  dependency  thereof,  or  under  the  laws  of  any  State,  depen- 
dency or  insular  possession  of  the  United  States  but  not  engaged  in  the 
general  business  of  buying  or  selling  goods,  wares,  merchandise  or  com- 
modities in  the  United  States  and  not  transacting  any  business  in  the  United 
States  except  such  as  in  the  judgment  of  the  Federal  Reserve  Board 
may  be  incidental  to  its  international  or  foreign  business:  PROVID- 
ED, HOWEVER,  That,  except  with  the  approval  of  the  Federal  Re- 
serve Board,  no  corporation  organized  hereunder  shall  invest  in  any 
one  corporation  an  amount  in  excess  of  10  per  centum  of  its  own 
capital  and  surplus,  except  in  a  corporation  engaged  in  the  business 


Commercial  Banking  and  Cpedits  441 

of  banking,  when  15  per  centum  of  its  capital  and  surplus  may  be  so 
invested:  PROVIDED  FURTHER,  That  no  corporation  organ- 
ized hereunder  shall  purchase,  own,  or  hold  stock  or  certificates  of 
ownership  in  any  other  corporation  organized  hereunder  or  under  the 
laws  of  any  State  which  is  in  substantial  competition  therewith,  or 
which  holds  stock  or  certificates  or  ownership  in  corporations  which 
are  in  substantial  competition  with  the  purchasing  corporation. 

Purchase  to  prevent  loss. — "Nothing  contained  herein  shall  prevent 
corporations  organized  hereunder  from  purchasing  and  holding  stock 
in  any  corporation  where  such  purchase  shall  be  necessary  to  prevent 
a  loss  upon  a  debt  previously  contracted  in  good  faith ;  and  stock  so 
purchased  or  acquired  in  corporations  organized  under  this  section 
shall  within  six  months  from  such  purchase  be  sold  or  disposed  of  at 
public  or  private  sale  unless  the  time  to  so  dispose  of  same  is  extended 
by  the  Federal  Reserve  Board. 

Limitations  on  Scope  of  Activities 

Business  in  United  States. — "No  corporation  organized  under  this 
section  shall  carry  on  any  part  of  its  business  in  the  United  States 
except  such  as,  in  the  judgment  of  the  Federal  Reserve  Board,  shall 
be  incidental  to  its  international  or  foreign  business :  AND  PRO- 
VIDED FURTHER,  That  except  such  as  is  incidental  and  prelim- 
inary to  its  organization  no  such  corporation  shall  exercise  any  of  the 
powers  conferred  by  this  section  until  it  has  been  duly  authorized 
by  the  Federal  Reserve  Board  to  commence  business  as  a  corporation 
organized  under  the  provisions  of  this  section. 

Price  Fixing 

"No  corporation  organized  under  this  section  shall  engage  in  com- 
merce or  trade  in  commodities  except  as  specifically  provided  in  this 
section,  nor  shall  it  either  directly  or  indirectly  control  or  fix  or  at- 
tempt to  control  or  fix  the  price  of  any  such  commodities.  The  char- 
ter of  any  corporation  violating  this  provision  shall  be  subject  to 
forfeiture  in  the  manner  hereinafter  provided  in  this  section.  It  shall 
be  unlawful  for  any  director,  officer,  agent,  or  employee  of  any  such 
corporation  to  use  or  to  conspire  to  use  the  credit,  the  funds,  or  the 
power  of  the  corporation  to  fix  or  control  the  price  of  any  such  com- 


442  Bank  and  Trade  Acceptances 

modities,  and  any  such  person  violating  this  provision  shall  be  liable 
to  a  fine  of  not  less  than  $1,000  and  not  exceeding  $5,000  or  imprison- 
ment for  not  less  than  one  year  and  not  exceeding  five  years,  or  both,  in 
the  discretion  of  the  court. 

Capital  Stock  and  Dividends 

$2,000,000  minimum;  investments  by  banks. — "No  corporation  shall 
be  organized  under  the  provisions  of  this  section  with  a  capital  stock 
of  less  than  $2,000,000,  one-quarter  of  which  must  be  paid  in  before 
the  corporation  may  be  authorized  to  begin  business,  and  the  remain- 
der of  the  capital  stock  of  such  corporation  shall  be  paid  in  install- 
ments of  at  least  10  per  centum  on  the  whole  amount  to  which  the 
corporation  shall  be  limited  as  frequently  as  one  installment  at  the 
end  of  each  succeeding  two  months  from  the  time  of  the  commence- 
ment of  its  business  operations,  until  the  whole  of  the  capital  stock 
shall  be  paid  in.  The  capital  stock  of  any  such  corporation  may  be 
increased  at  any  time,  with  the  approval  of  the  Federal  Reserve 
Board,  by  a  vote  of  two-thirds  of  its  shareholders  or  by  unanimous 
consent  in  writing  of  the  shareholders  without  a  meeting  and  without 
a  formal  vote,  but  any  such  increase  of  capital  shall  be  fully  paid  in 
within  ninety  days  after  such  approval ;  and  may  be  reduced  in  like 
manner,  provided  that  in  no  event  shall  it  be  less  than  $2,000,000.  No 
corporation,  except  as  herein  provided,  shall  during  the  time  it  shall 
continue  its  operations,  withdraw  or  permit  to  be  withdrawn,  either  in 
the  form  of  dividends  or  otherwise,  any  portion  of  its  capital. 

Purchase  of  stock. — "Any  national  banking  association  may  invest 
in  the  stock  of  any  corporation  organized  under  the  provisions  of  this 
section,  but  the  aggregate  amount  of  stock  held  in  all  corporations  en- 
gaged in  business  of  the  kind  described  in  this  section  and  in  section 
25  of  the  Federal  Reserv^  Act  as  amended  shall  not  exceed  10  per 
centum  of  the  subscribing  bank's  capital  and  surplus. 

American  Ownership 

Directors,  officers,  etc. — "A  majority  of  the  shares  of  the  capital 
stock  of  any  such  corporation  shall  at  all  times  be  held  and  owned  by 
citizens  of  the  United  States,  by  corporations  the  controlling  interest 
in  which  is  owned  by  citizens  of  the  United  States,  chartered  under 


Commercial  Banking  and  Cp£dits  443 

the  laws  of  the  United  States  or  of  a  State  of  the  United  States,  or  by 
firms  or  companies,  the  controlling  interest  in  which  is  owned  by 
citizens  of  the  United  States.  The  provisions  of  section  8  of  the  Act 
approved  October  15,  1914,  entitled  'An  Act  to  supplement  existing 
laws  against  unlawful  restraints  and  monopolies,  and  for  other  pur- 
poses,' as  amended  by  the  Acts  of  May  15,  1916,  and  September  7, 
1916,  shall  be  construed  to  apply  to  the  directors,  other  officers,  agents, 
or  employees  of  corportaions  organized  under  the  provisions  of  this 
section:  PROVIDED,  HOWEVER,  That  nothing  herein  contained 
shall  (1)  prohibit  any  director  or  other  officer,  agent  or  employee  of 
any  member  bank,  who  has  procured  the  approval  of  the  Federal  Re- 
serve Board  from  serving  at  the  same  time  as  a  director  or  other 
officer,  agent  or  employee  of  any  corporation  organized  under  the  pro- 
visions of  this  section  in  whose  capital  stock  such  member  bank  shall 
have  invested;  or  (2)  prohibit  any  director  or  other  officer,  agent,  or 
employee  of  any  corporation  organized  under  the  provisions  of  this 
section,  who  has  procured  the  approval  of  the  Federal  Reserve  Board, 
from  serving  at  the  same  time  as  a  director  or  other  officer,  agent  or 
employee  of  any  other  corporation  in  whose  capital  stock  such  first 
mentioned  corporation  shall  have  invested  under  the  provisions  of 
this  section. 

Directors 

Reserve  Board  members. — "No  member  of  the  Federal  Reserve 
Board  shall  be  an  officer  or  director  of  any  corporation  organized  un- 
der the  provisions  of  this  section,  or  of  any  corporation  engaged  in  a 
similar  business  organized  under  the  laws  of  any  State,  nor  hold  stock 
in  any  such  corporation,  and  before  entering  upon  his  duties  as  a  mem- 
ber of  the  Federal  Reserve  Board  he  shall  certify  under  oath  to  the 
Secretary  of  the  Treasury  that  he  has  complied  with  this  requirement. 

DISSOLUTION 

Liability  of  Stockholders,  Officers  and  Directors 

"Shareholders  in  any  corporation  organized  under  the  provisions  of 
this  section  shall  be  liable  for  the  amount  of  their  unpaid  stock  sub- 
scriptions. No  such  corporation  shall  become  a  member  of  any  Fed- 
eral Reserve  bank. 


444  Bank  and  Trade  Acceptances 

Forfeiture  of  Franchise 

Violation  of  law. — "Should  any  corporation  organized  hereunder 
violate  or  fail  to  comply  with  any  of  the  provisions  of  this  section,  all 
of  its  rights,  privileges,  and  franchises  derived  herefrom  may  thereby 
be  forfeited.  Before  any  such  corporation  shall  be  declared  dis- 
solved, or  its  rights,  privileges,  and  franchises  forfeited,  any  noncom- 
pliance with,  or  violation  of  such  laws  shall,  however,  be  determined 
and  adjudged  by  a  court  of  the  United  States  of  competent  jurisdic- 
tion, in  a  suit  brought  for  that  purpose  in  the  district  or  territory  in 
which  the  home  office  of  such  corporation  is  located,  which  suit  shall 
be  brought  by  the  United  States  at  the  instance  of  the  Federal  Reserve 
Board  or  the  Attorney  General.  Upon  adjudication  of  such  noncom- 
pliance or  violation,  each  director  and  officer  who  participated  in,  or 
assented  to,  the  illegal  act  or  acts,  shall  be  liable  in  his  personal  or 
individual  capacity  for  all  damages  which  the  said  corporation  shall 
have  sustained  in  consequence  thereof.  No  dissolution  shall  take 
away  or  impair  any  remedy  against  the  corporation,  its  stockholders, 
or  officers  for  any  liability  or  penalty  previously  incurred. 

Voluntary  liquidation. — "Any  such  corporation  may  go  into  volun- 
tary liquidation  and  be  closed  by  a  vote  of  its  shareholders  owning 
two-thirds  of  its  stock. 

Insolvency  and  Receivership 

"Whenever  the  Federal  Reserve  Board  shall  become  satisfied  of  the 
insolvency  of  any  such  corporation,  it  may  appoint  a  receiver  who  shall 
take  possession  of  all  of  the  property  and  assets  of  the  corporation  and 
exercise  the  same  rights,  privileges,  powers,  and  authority  with  respect 
thereto  as  are  now  exercised  by  receivers  of  national  banks  appointed 
by  the  Comptroller  of  the  Currency  of  the  United  States :  PROVID- 
ED, HOWEVER,  That  the  assets  of  the  corporation  subject  to  the 
laws  of  other  countries  or  jurisdictions  shall  be  dealt  with  in  accord- 
ance with  the  terms  of  such  laws. 

Finances 

Annual  meetings;  reports  and  examinations. — "Every  corporation 
organized  under  the  provisions  of  this  section  shall  hold  a  meeting  of 


Commercial  Banking  and  Cpedits  445 

its  stockholders  annually  upon  a  date  fixed  in  its  by-laws,  such  meet- 
ing to  be  held  at  its  home  office  in  the  United  States.  Every  such 
corporation  shall  keep  at  its  home  office  books  containing  the  names 
of  all  stockholders  thereof,  and  the  names  and  addresses  of  the  mem- 
bers of  its  board  of  directors,  together  with  copies  of  all  reports  made 
by  it  to  the  Federal  Reserve  Board.  Every  such  corporation  shall  make 
reports  to  the  Federal  Reserve  Board  at  such  times  and  in  such  forms 
as  it  may  require ;  and  shall  be  subject  to  examination  once  a  year 
and  at  such  other  times  as  may  be  deemed  necessary  by  the  Federal 
Reserve  Board  by  examiners  appointed  by  the  Federal  Reserve  Board, 
the  cost  of  such  examinations,  including  the  compensation  of  the  ex- 
aminers, to  be  fixed  by  the  Federal  Reserve  Board  and  to  be  paid  by 
the  corporation  examined. 

Dividends. — "The  directors  of  any  corporation  organized  under  the 
provisions  of  this  section  may,  semiannually,  declare  a  dividend  of  so 
much  of  the  net  profits  of  the  corporation  as  they  shall  judge  expedi- 
ent; but  each  corporation  shall,  before  the  declaration  of  a  dividend, 
carry  one-tenth  of  its  net  profits  of  the  preceding  half  year  to  its  sur- 
plus fund  until  the  same  shall  amount  to  20  per  centum  of  its  capital 
stock. 

Taxation 

State  Taxation. — "Any  corporation  organized  under  the  provisions 
of  this  section  shall  be  subject  to  tax  by  the  State  within  which  its 
home  office  is  located  in  the  same  manner  and  to  the  same  extent 
as  other  corporations  organized  under  the  laws  of  that  State  which 
are  transacting  a  similar  character  of  business.  The  shares  of  stock 
in  such  corporation  shall  also  be  subject  to  tax  as  the  personal  prop- 
erty of  the  owners  or  holders  thereof  in  the  same  manner  and  to  the 
same  extent  as  the  shares  of  stock  in  similar  State  corporations. 

Renewal 

Twenty-year  period. — "Any  corporation  organized  under  the  pro- 
visions of  this  section  may  at  any  time  within  the  two  years  next 
previous  to  the  date  of  the  expiration  of  its  corporate  existence,  by  a 
vote  of  the  shareholders  owning  two-thirds  of  its  stock,  apply  to  the 
Federal  Reserve  Board  for  its  approval  to  extend  the  period  of  its 


446  Bank  and  Trade  Acceptances 

corporate  existence  for  a  term  of  not  more  than  twenty  years,  and 
upon  certified  approval  of  the  Federal  Reserve  Board  such  corpora- 
tion shall  have  its  corporate  existence  for  such  extended  period  unless 
sooner  dissolved  by  the  act  of  the  shareholders  owning  two-thirds  of 
its  stock,  or  by  an  act  of  Congress  or  unless  its  franchise  becomes  for- 
feited by  some  violation  of  law. 

Conversion 

Conversion  of  State  institutions;  State  law. — "Any  bank  or  bank- 
ing institution  principally  engaged  in  foreign  business  incorporated 
by  special  law  of  any  State  or  of  the  United  States  or  organized  under 
the  general  laws  of  any  State  or  of  the  United  States  and  having  an 
unimpaired  capital  sufficient  to  entitle  it  to  become  a  corporation  un- 
der the  provisions  of  this  section  may,  by  the  vote  of  the  shareholders 
owning  not  less  than  two-thirds  of  the  capital  stock  of  such  bank  or 
banking  association,  with  the  approval  of  the  Federal  Reserve  Board, 
be  converted  into  a  Federal  corporation  of  the  kind  authorized  by 
this  section  with  any  name  approved  by  the  Federal  Reserve  Board : 
PROVIDED,  HOWEVER,  That  said  conversion  shall  not  be  in  con- 
travention of  the  State  law.  In  such  case  the  articles  of  association 
and  organization  certificate  may  be  executed  by  a  majority  of  the  di- 
rectors of  the  bank  or  banking  institution,  and  the  certificate  shall  de- 
clare that  the  owners  of  at  least  two-thirds  of  the  capital  stock  have 
authorized  the  directors  to  make  such  certificate  and  to  change  or 
convert  the  bank  or  banking  institution  into  a  Federal  Corporation. 
A  majority  of  the  directors,  after  executing  the  articles  of  associa- 
tion and  the  organization  certificate,  shall  have  power  to  execute  all 
other  papers  and  to  do  whatever  may  be  required  to  make  its  organi- 
zation perfect  and  complete  as  a  Federal  corporation.  The  shares  of 
any  such  corporation  may  continue  to  be  for  the  same  amount  each  as 
they  were  before  the  conversion,  and  the  directors  may  continue  to  be 
directors  of  the  corporation  until  others  are  elected  or  appointed  in  ac- 
cordance with  the  provisions  of  this  section.  When  the  Federal  Re- 
serve Board  has  given  to  such  corporation  a  certificate  that  the  pro- 
visions of  this  section  have  been  compiled  with,  such  corporation  and 
all  its  stockholders,  officers,  and  employees,  shall  have  the  same  pow- 
ers and  privileges,  and  shall  be  subject  to  the  same  duties,  liabilities, 
and  regulations,  in  all  respects,  as  shall  have  been  prescribed  by  this 
section  for  corporations  originally  organized  hereunder. 


Commercial  Banking  and  Cp£dits  447 

Embezzlement — Penalties 

False  entries;  penalties  for  abuses. — "Every  officer,  director,  clerk, 
employee,  or  agent  of  any  corporation  organized  under  this  section 
who  embezzles,  abstracts,  or  wilfully  misapplies  any  of  the  moneys, 
funds,  credits,  securities,  evidences  of  indebtedness  or  assets  of  any 
character  of  such  corporation;  or  who,  without  authority  from  the 
directors,  issues  or  puts  forth  any  certificate  of  deposit,  draws  any  or- 
der or  bill  of  exchange,  makes  any  acceptance,  assigns  any  note,  bond, 
debenture,  draft,  bill  of  exchange,  mortgage,  judgment,  or  decree ;  or 
who  makes  any  false  entry  in  any  book,  report,  or  statement  of  such 
corporation  with  intent,  in  either  case,  to  injure  or  defraud  such  cor- 
poration or  any  other  company,  body  politic  or  corporate,  or  any  indi- 
vidual person,  or  to  deceive  any  officer  of  such  corporation,  the  Federal 
Reserve  Board,  or  any  agent  or  examiner  appointed  to  examine  the 
affairs  of  any  such  corporation ;  and  every  receiver  of  any  such  cor- 
poration, and  every  clerk  or  employee  of  such  receiver  who  shall 
embezzle,  abstract,  or  willfully  misapply  or  wrongfully  con- 
vert to  his  own  use  any  moneys,  funds,  credits,  or  asests  of 
any  character  which  may  come  into  his  possession  or  under  his  con- 
trol in  the  execution  of  his  trust  on  the  performance  of  the  duties 
of  his  employment;  and  every  such  receiver  or  clerk  or  employee  of 
such  receiver  who  shall,  with  intent  to  injure  or  defraud  any  person, 
body  politic  or  corporate,  or  to  deceive  or  mislead  the  Federal  Re- 
serve Board,  or  any  agent  or  examiner  appointed  to  examine  the  af- 
fairs of  such  receiver,  shall  make  any  false  entry  in  any  book,  report, 
or  record  of  any  matter  connected  with  the  duties  of  such  receiver; 
and  every  person  who  with  like  intent  aids  or  abets  any  officer,  direc- 
tor, clerk,  employee,  or  agent  of  any  corporation  organized  under  tliis 
section,  or  receiver  or  clerk  or  employee  of  such  receiver  as  aforesaid 
in  any  violation  of  this  section,  shall  upon  conviction  thereof  be  im- 
prisoned for  not  less  than  two  years  nor  more  than  ten  years,  and  may 
also  be  fined  not  more  than  $5,000,  in  the  discretion  of  the  court. 

False  Representation 

"Whoever  being  connected  in  any  capacity  with  any  corporation 
organized  under  this  section  represents  in  any  way  that  the  United 
States  is  liable  for  the  payment  of  any  bond  or  other  obligation,  or  the 


448 


Bank  and  Trade  Acceptances 


interest  thereon,  issued  or  incurred  by  any  corporation  organized  here- 
under, or  that  the  United  States  incurs  any  liability  in  respect  of  any 
act  or  omission  of  the  corporation,  shall  be  punished  by  a  fine  of  not 
more  than  $10,000  and  by  imprisonment  for  not  more  than  five  years." 


\^^ 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 
This  book  is  DUE  on  the  last  date  stamped  below 


.JAN  2  7  1954 

dUL30ig76 


Form  L-0 


UKiVEU^.ii  uF  CALIFORNIA 

AT 

LOS  ANGELES 

LIBRARY 


UC  SOUTHERN  REGIONAL  LIBRARY  FACIl  ITY 


--     Jilll  III  till  lllli 

AA    000  559  601     0 


